The Central Bank of Kenya (CBK) has warned that the Nairobi Securities Exchange (NSE) faces a concentration risk in the dominance of equities ownership by foreign nationals saying that the issue poses a threat to the country’s economy in the event the foreign investors dump their stocks and leave the country at the same time.
CBK in its Kenya Financial Sector Stability Report for the year ended December 2018 says that foreign investors accounted for 63.28 percent of total equity turnover in 2018 compared to 63.23 percent in 2017, a marginal rise of 0.005%.
“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,”Central Bank of Kenya
In an exclusive interview with Business Today, financial services firm, Enwealth Managing Director Simon Wafubwa said that the stocks doing well at NSE are ‘defensive stocks’ 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,” said Wafubwa.
The monetary policy regulator also warns that the dominance of the bourse by five big companies is an indictment of the Kenyan economy even as it hailed the Capital Markets Authority (CMA) efforts in attracting domestic investors at NSE through initiatives such as the Growth Enterprise Market (GEMs) a program which attracts Small and Medium-Sized Companies (SMEs) to list.
Safaricom (Ksh1.1 trillion), East African Breweries Limited (Ksh173 billion), Equity Group (Ksh158 billion), KCB Group (Ksh137 billion) and Cooperative Bank (Ksh81.8 billion) account for 65.82 percent market capitalization.
“Top five companies by market capitalization accounted for 65.82 percent market capitalization from 64.83 percent in 2017, of which, Safaricom accounted for 42.31 percent,” further reads the report.
Three of the above firms are financial institutions, an indicator of lack of diversity at the bourse. The concentration of wealth among these five companies also raises questions about the business environment as new companies are unable able to disrupt the market.
CBK also warned that the dominance of the fixed income market segment by government bonds poses a concentration risk.
According to the CBK, government bonds trading accounted for more than 99 percent of fixed income market segment over the course of the year.
The main challenges that the bourse experience include low liquidity in the equity market; limited issuance of corporate bonds; low uptake of new and existing products and services including Exchange Traded Funds, Real Estate Investment Trusts (REITs) and Asset-Backed Securities.
Others included crypto-assets related risks and regulatory challenges, market infrastructure failures as well as cyber risks, political and economic risks.