By JAMES ANYANZWA

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Stock trading on the Nairobi Securities Exchange (NSE) has significantly declined as a result of big firms’ dominance, lack of new listings and falling investor demand, according to the latest disclosures by the Central Bank of Kenya (CBK).

The liquidity of company shares on the Kenyan bourse declined to 4.8 percent last year from 5.9 percent in 2021 and 6.4 percent in 2020, reflecting continued lower demand from investors, according to Central Bank’s Financial Sector Stability Report dated September 2023.

“This is despite implementation of securities lending reforms enabling market participants to buy and sell securities, thereby enhancing liquidity,” the report says.

“It may also reflect lack of initial public offerings (IPOs) as well as other innovative products.”

Read: Cross-listed firms hard-hit by drop in trade volumes

According to CBK, market concentration risk remains high at the NSE, with the top five listed firms accounting for an average of 72.7 percent of total equity turnover in 2022 compared to 68.5 percent in 2021.

Insurance companies and banks accounted for 31.4 percent of the market turnover in 2022, with Safaricom only accounting for 50 percent of total equity turnover in the period.

The primary market for equities remained subdued in 2022, with no new listing of shares through IPOs, rights issues or share splits.

“Capital markets remain under pressure as the bear run continues and volatility elevated at the marketplace. More foreign investors continue to exit and very few are buying shares, leading to net capital outflow as macro-financial risks remain elevated,” says CBK.

“Capital markets face flight to safety by investors, characterised by excess volatility, reduced liquidity and high concentration risk.”

Foreign investors maintained the sale side, contributing to further decline in market activity in 2022 and into the first half of 2023. The average foreign investor participation to total equity turnover declined from annual average of 57.1 percent in 2021 to an average of 43.1 percent in the first half of 2023.

The net selloffs continue to weigh in one the exchange rate causing further volatility and low appetite for local equities market.

Shocks effect

According to CBK, multiple shocks locally and globally have delayed the recovery of the market on the purchase side.

Read: Kenya bourse ranked worst performing in Africa

While investors deployed hedging strategies, including single stocks and index futures to mitigate market risk in 2022, the Nairobi All Share Index (Nasi) declined by 11.9 percent as of December 2022 compared to a year earlier, the NSE 20 Share Index fell by 23.4 percent and and market capitalisation fell by 23.4 percent in the period.

By end of June, NASI had further declined by six percent while the NSE 20 Share Index and market capitalisation had fallen by 16.1 percent each from their December 2022 level.

“The NSE therefore continues to experience bear market as global risks spillovers remain elevated,” says CBK.

Total equity turnover declined by 31.7 percent and and total shares traded fell by 23.9 percent in 2022 compared with 2021 as investors kept off the market.

Profitability of listed non-financial corporates increased by six percent in 2022 compared with 2021.

Improved profitability is also reflected in the fewer number of listed firms that issued profits warnings in 2022. Only one listed firm issued a profit warning compared with seven firms in 2021.

In 2015, 18 companies reported their annual profits falling by at least 25 percent from the previous year.

Read: Bonds market plunge leaves NSE investors at a crossroads

The fixed income segment remained subdued in 2022, albeit some positive developments that included the listing of the Acorn Holdings’ Ksh1.22 billion ($8.18 million) bond, East Africa Breweries Ltd’s five-year corporate bond worth Ksh11 billion ($73.82 million) and the Kenya Mortgage Refinance Corporation’s Ksh1.4 billion bond.

The bear equities market, however, spilled over to the fixed income market segment that saw heavy undersubscriptions in the primary market. This contributed to a decline of bonds trading in the secondary market by 22.5 percent to Ksh741.8 billion ($4.97 billion) in 2022 from Ksh957 billion ($6.42 billion) in 2021. Most investors held bonds to maturity, exacerbating liquidity problems in the secondary bond market.

A similar weak investor appetite for bonds in the secondary market was recorded in the primary market, where most bonds offered were oversubscribed in 2022.

According to CBK low demand amid rising interest rates, pushed the government securities yield curve outward, signaling higher domestic debt cost.