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Capital markets watchdog blows whistle on foreign equity outflows at Nairobi bourse

Tuesday February 08 2022
Nairobi Securities Exchange

There has been a drop in foreign investors at the Nairobi Securities Exchange as more capital shifted abroad. PHOTO | FILE

By VINCENT OWINO

The Nairobi Securities Exchange registered a net foreign equity outflow of $44 million in the last quarter of 2021 from $8.2 million in the previous quarter, warranting a "high" risk level rating by the Capital Markets Authority (CMA), in the Capital Market Soundness Report Q4 2021 released on Monday.

The CMA attributed this development to the interruption caused by the announcement of the Omicron variant last November.

The declaration led to a decrease in foreign investor participation by 13.66 percent, and a subsequent net outflow of $37 million, accounting for 42.16 percent of total net foreign outflows in 2021.

"The higher net foreign outflows in November 2021 were mainly due to exits from Safaricom due to the political situation in Ethiopia, and jitters during the initial days of the Omicron variant. We don’t anticipate additional substantial risk from both situations," said Lisa Kimathi, senior associate for research at Standard Investment Bank in Nairobi.

"An increase in outflows in one quarter does not translate to a trend. Net foreign outflows increased in November 2021, but declined the following month, with a further reduction in January 2022," she added.

Global developments

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"The historical data is not a concern, but we are watching upcoming global developments, which could incentivise foreign investors to increase capital allocation in developed markets over frontier markets," Ms Kimathi told The EastAfrican.

To mitigate the risk of net foreign outflows, CMA has embarked on a campaign to improve domestic participation and investment among Kenyans, mainly through investor education.

"A key lesson learnt in this season is the importance of having deep and efficient capital markets with maximum participation by domestic investors, both institutional and retail," Wycliffe Shamiah, the CMA chief executive, said at the release of the soundness report.

Day trading

In the quarter under review, NSE launched day trading, allowing stock traders to buy and sell securities within a single day or multiple times in a trading session, in order to improve market liquidity, turnover, investor participation in the market and revenue collection.

The CMA also issued guidelines on share buybacks, to raise investor confidence in the markets by boosting protection and orderliness.

"Limited companies will now be able to repurchase their own outstanding shares, a move that will ensure that the value of the shares is inflated and that the shareholders have a larger stake in the company," CMA said in the report.

Even so, majority of the market participants in the ended quarter were local investors, whose per capita share quantities are relatively low compared with foreign and East African investors, who accounted for 17.69 percent and 1.21 percent of the participants respectively.

The general market performance in the quarter was, however, promising, with the market share volume rising by 6.33 percent and equity turnover increasing by 15.78 percent.

Being the largest capital market in East Africa, the increase in net foreign outflows in NSE in the last quarter has adverse implications for the Uganda, Tanzania, and Rwanda stock markets.

"Foreign investors classify most African markets under their frontier market investments and trade in the larger markets due to their ticket sizes and need for liquidity," Ms Kimathi said.

Increased activity

In the same period, USE registered iincreased activity, largely on account of higher domestic participation. This was mainly due to the listing of telecommunication company, MTN Uganda. This led to a 99.3 percent rise in locally listed stocks. Equity turnover in the same period rose by 121.9 percent.

"Risks to the growth outlook, however, remain tilted to the downside, consisting of weaker than expected global economic growth due to supply chain disruptions and the Omicron variant that has injected renewed uncertainty into the global economic picture," the Capital Markets Authority of Uganda said in its quarterly bulletin for Q4 2021.

Tanzania and Rwanda are yet to release their capital markets performance reports for the quarter, but according to CMA Uganda’s report, Dar es Salaam Stock Exchange (DSE) registered a 0.4 percent drop in domestic market capitalisation, with RSE’s dropping by 5.5 percent.

In the last quarter of 2021, the DSE’s equity turnover dropped by 51.4 percent, while Rwanda Stock Exchange grew by 21.2 percent.

According to CMA(U), the results were as a result of increased investor participation in Rwanda, as Tanzania experienced low market activity from Covid-19 generated uncertainties.

According to the CMA, the global capital markets experienced the same turbulence witnessed in Kenya, with the overall global, emerging, and frontier (under which all EA markets fall) markets registering a change of 6.68 percent, negative 1.31 percent, and 0.74 percent in market returns respectively.

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