This archive report was first published on 26 November 2019.
The Nairobi Securities Exchange (NSE) faces a significant risk due to the concentration of foreign investors' ownership of equities, according to the Central Bank of Kenya (CBK). This dominance poses a threat to the country's economy in the event that foreign investors dump their stocks and leave the country simultaneously.
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 increase from 63.23 percent in 2017. The report notes that abrupt sell-offs by foreign investors can lead to excess volatility, as seen in the first half of 2018 following interest rate hikes in advanced economies and emerging markets.
Financial services firm Enwealth's Managing Director Simon Wafubwa attributes the success of certain stocks at the NSE to 'defensive stocks' that provide essential products or services. He also notes that foreign investors are sensitive to return expectations, investing for reasons such as dividend yield and capital gains.
The CBK 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. The concentration of wealth among these five companies raises questions about the business environment and the ability of new companies 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 over 99 percent of the fixed income market segment in 2018.
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. Other challenges include crypto-assets related risks, regulatory challenges, market infrastructure failures, and cyber risks.
