By KEPHA MUIRURI

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Foreign investors pulled out Sh178.2 million ($1.1 million) from the Nairobi Securities Exchange (NSE) last month, marking a fifth straight month of withdrawals and stretching a run of capital flight from the past year.

The continued foreign investor sell-offs has been linked to a disparity in returns where investments in advanced economies yield greater gains than those in emerging and frontier economies after notable interest rate increases by their respective Central Banks.

Last year, foreign investors remained net sellers at the NSE, marking Ksh21.2 billion ($132 million) in net portfolio outflows, according to data from the Capital Markets Authority. The bulk of the sell-offs took place in March, at Ksh10.6 billion ($66 million) , while flows marked a positive surprise in June and August as the foreigners turned buyers, purchasing shares worth Ksh113 million ($704,049) and Ksh672 million ($4.19 million) respectively.

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While major central banks have indicated imminent interest rate cuts, which could cushion foreign flows back to markets such as Kenya, senior research nnalyst at AIB-AXYs Africa Ronny Chokaa says the interest rate differential remains in favour of developed markets, even as competition among emerging and frontier economies further dictate the direction and destination of flows.

Competition

“From our point of view, we think that interest rate differentials currently remain in favour of developed markets, and as such, we see more runway for further tightening of the policy rate in order to spark a reversal. However, competition from active bourses across peer frontier and emerging markets has also fuelled intense rivalry for capital, especially in the wake of disruptive technologies such as AI,” he said.

The continued exit of foreign investors has served to extend a long run of low stock valuations in the NSE’s bear run as foreign investors drive the direction of the market based on their significant market turnover.

Last year, the NSE recorded a 27.5 percent fall in paper wealth amounting to Ksh547 billion ($3.4 billion), with the bourse’s market cap closing 2023 at Ksh1.439 trillion ($8.97 billion).

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The Nairobi All Share Index (Nasi), which tracks the performance of all stocks, fell by a similar percentage, while the NSE20 and NSE25 indexes contracted by 10.4 and 24 percent respectively.

In January, the NSE remained largely unchanged with the Nasi index merely rising to 92.18 points.

Despite expected tailwinds from the expected interest rate cuts in developed markets, Mr Chokaa argues the return of foreigners to the bourse will require more incentives, including new listings.

“Even in the positive scenario of a sequential rate cut in developed markets, I think the NSE and market players overall will have to strengthen their value proposition in order to attract the extra investable dollar or pound in the market,” he said.