The weakening of the shilling and falling blue chip stock prices have left the Nairobi Securities Exchange (NSE) at a disadvantage against African peers in the race for limited foreign investor dollars, dampening hopes of a recovery this year for the depressed market.
The Morgan Stanley Capital International (MSCI) Kenya Index, which guides foreign investors on local market investments, shows a return of -34 percent over the past 12 months.
This index currently tracks the performance of the shares of Safaricom, Equity and KCB in Kenya on dollar terms.
Only Zimbabwe (-71 percent) and Morocco (-37 percent) have recorded a lower dollarized return compared to Kenya in the period among the 10 frontier and emerging markets tracked by the MSCI index in Africa.
The top performing markets include Senegal (five percent), Nigeria (-7 percent) and South Africa (-8 percent), meaning that a foreign investor looking to push capital into the continent’s equities will suffer lower currency-linked erosion of returns in these markets compared to the likes of Nairobi and Rabat.
Kenya’s stock market recorded a net foreign outflow of Sh24.4 billion last year, reflecting the global capital flight to developed markets bonds where interest rates have increased.
This was replicated in other African markets, meaning that competition for the limited dollar inflows became heightened as investors became choosier on where to put in capital.
A market offering better protection against exchange losses would, therefore, be more attractive to foreign capital.
For the three Kenyan stocks on the country’s MSCI index, the dollar returns were depressed by the double hit of falling share prices and a weakening shilling.
Safaricom, which carries the biggest weight on the MSCI Kenya Index due to its status as the NSE’s largest stock by market capitalisation, has shed 36 percent in price over the last 12 months.
Foreigners have outsized exposure to the stock, owing to its large liquidity and business performance, including profits and dividends.
The share prices of Equity Group and KCB have also retreated in the period, by 10 percent and 14.5 percent respectively.
The three stocks account for 62 percent of the NSE’s total investor wealth, and also account for a significant share of daily trading, especially on foreign investor trades.
Over the same 12-month period, the shilling has depreciated by 8.7 percent against the dollar, meaning that foreign investors who are selling shares will incur higher costs when buying dollars in case of expatriation of gains abroad.
The shilling’s performance of the dollar is, therefore, a big factor in the stock market for foreign investors, who suffer exchange losses or make gains depending on whether it is depreciating or appreciating against the greenback.
When entering the market, foreign investors convert their dollars to shillings and do the reverse after selling to shift capital out of the country.
