Over Four Billion NSE Shares sold by Foreign Investors

Over four billion Nairobi Securities Exchange (NSE) shares have been sold off by foreign investors over the course of several years, leading to a more volatile market and low stock prices.

A review of data from the Capital Markets Authority (CMA) reveals that between November 2019 and November 2022, foreign holdings of listed equities decreased by 4.3 billion units.

Analysts have linked the liquidation of holdings to a number of challenges, including the Covid-19 scourge, the rise in interest rates, and the current foreign exchange rate crisis.

Foreign ownership of NCBA Group fell the most dramatically, by a whopping 71 percent, from 1.29 percent to 0.37 percent, or the equivalent of 6.1 million shares.

Other notable companies with a sharp decline in foreign ownership include KCB (59%) Express Kenya (54%) Olympia Capital (54.6%) Kenya Re (58%) and Centum Investment (39.2 percent).

Local institutional and retail investors have stepped in to buy the shares that were sold, but the departure of foreign investors is seen as hurting the market because offshore participants are thought to be the ones who set prices for the bourse due to their historically high turnover rates, which are the basis for price discovery for listed equities.

For instance, the average participation of foreign investors in the quarter ending in December was 54.84 percent, indicating that despite having lower stock holdings, they still account for more than half of trading activity at the stock exchange.

In contrast, local institutional and individual investors tend to buy and hold stocks, particularly the latter frustrating opportunity for price discovery at the NSE.

“Unlike the local retail investors, most foreigners keep restructuring their portfolio. The reduced holding by foreign investors is, therefore, negative for the NSE as it is a significant driver for stock price falls which contributes to high volatility in the market,” said Solomon Kariuki, a research analyst at AIB-AXYS Africa brokerage.

The exodus of foreign investors has also been linked to the market’s dearth of fresh investment opportunities; the NSE’s most recent IPO occurred more than eight years ago.

Three years in a row of net foreign portfolio outflows have coincided with lower foreign holdings of NSE-listed stocks.

According to secondary data from the CMA, net portfolio outflows by foreign investors totalled Sh63.2 billion in the three years between 2020 and the end of 22. The pandemic year saw the highest selloffs.

Foreign exchange problems in Kenya and difficulties in obtaining foreign currency there have sped up exodus of foreign investors this year.

Foreigners have chosen to cut their losses now rather than later in case the foreign exchange problems are worse due to the biting dollar shortages and the sharp depreciation of the local currency in the year to date.

“A foreign investor would rather leave now than wait six months down the line when the currency situation may be worse. Foreign investors have decided to even leave dividends on counters such as BAT and Safaricom on the table. They have struggled to execute sale orders when the supply of dollars has been limited to say $10,000 a day,” added Mr Kariuki.

Since the implementation of capital gains taxes in 2015, according to analysts at Sterling Capital, the sentiment of foreign investors has been deteriorating. The negative sentiment was exacerbated by the 2016 interest rate cap, which reduced interest margins for banks, which represent important NSE stocks.

Analysts claim that because of the emergence of foreign exchange problems, Kenya has missed out on returning foreign investor flows to frontier and emerging markets.

“A foreign investor can get their money in but can’t get it out in a sense and so even with the return of capital to frontier and emerging markets, the flows have not been coming to Kenya,” the analysts noted.

Despite the decline in foreign ownership of NSE stocks, a few stocks have stood out. The most notable of these is Absa Bank Kenya, where foreign ownership has increased by more than eight times, with foreigners now owning 3.8 billion shares, or 70.1 percent, of the listed lender.