This archive report was first published on 26 November 2019.
The Nairobi Securities Exchange (NSE) is facing a concentration risk due to the dominance of foreign investors, according to the Central Bank of Kenya (CBK). This poses a threat to the country's economy if foreign investors were to suddenly sell their stocks and leave the country.
CBK's Kenya Financial Sector Stability Report 2018 highlights that foreign investors accounted for 63.28 percent of total equity turnover in 2018, a marginal rise from 63.23 percent in 2017.
“While this is positive news, abrupt sell-offs by this investor category can lead to excess volatility as noted in the first half of 2018 following interest rates hike in the advanced economies and emerging markets and the consequent search for yield,”
the Central Bank of Kenya warns.
Financial services firm Enwealth's Managing Director Simon Wafubwa attributes the success of certain stocks at the NSE to their defensive nature, providing essential products or services that the public cannot do without.
“Foreign investors are quite sensitive in terms of return expectations, they invest for different reasons, dividend yield and the upsurge in terms of share valuation so that they lock the capital gains,” Wafubwa said.
The CBK also warns that the dominance of the bourse by five big companies is an indictment of the Kenyan economy. These companies, Safaricom, East African Breweries Limited, Equity Group, KCB Group, and Cooperative Bank, account for 65.82 percent of market capitalization.
Three of these firms are financial institutions, indicating a lack of diversity at the bourse. The concentration of wealth among these five companies raises questions about the business environment, as new companies struggle to disrupt the market.
CBK also highlights the concentration risk posed by the dominance of the fixed income market segment by government bonds, which accounted for more than 99 percent of fixed income market segment over the course of the year.
The main challenges facing the NSE include low liquidity in the equity market, limited issuance of corporate bonds, and low uptake of new and existing products and services.
