Investors turn to bonds as a safe bet during election period

NAIROBI, KENYA: Foreign traders at Nairobi Securities Exchange (NSE) sold shares worth Sh34.2 billion in three months ended September due to heightened political uncertainty.

According to the data from the market regulator, Capital Markets Authority (CMA, most of the foreign investors chose to sell their stakes in the period between July and September.

Compared to the Sh34.2 billion foreign investor sales, shares worth Sh23.1 billion were purchased, leading to a net foreign equity outflow of Sh11.1 billion. In addition, foreigners, who ordinarily command the activities on the Nairobi bourse have cut their participation to an average of 54 per cent.

The participation fell to the low of 49.14 per cent in July as Kenyans were preparing to go to the August 8 elections. Since January, investor participation had been averaging above 65 per cent.  

According to Luke Ombara, the CMA Director for Regulatory Policy and Strategy, the market has been affected by uncertainty during the electioneering period and this has been further exacerbated by mixed signals and interpretations over the next steps towards concluding the presidential elections.

“The Sh11.1 billion foreign equity outflow registered in the third quarter was largely as a result of heightened political uncertainty in the country but is expected to rebound, as long as the current situation does not become protracted,” said Mr Ombara in the report.

Despite foreigners taking off, investor wealth as reflected by end-period market capitalisation increased by 20.7 per cent to Sh2.38 trillion, compared with Sh1.97 trillion in the third quarter of 2016.

Equity turnover also increased from Sh48.14 billion in the third quarter of 2016 to Sh53.58 billion in the quarter under review. At the same time, NSE 20 and all share indices were on 18.62 per cent and 15.67 per cent upward trend.

However, more investors turned to bonds, which in times of uncertainty, is seen as a safe bet due to its fixed return nature. This sent the bond market performance to the highest level in third quarter since 2014.

Comparing third quarter of last year to that of this year, the bond market performance rose by 44.6 per cent posting a turnover of Sh108.16 billion, up from Sh74.81 last year.

As legal minds in the country continue to differ on the legality of the repeat poll scheduled for next week, the market shed Sh26 billions of investors’ paper wealth after close of trading week.

Given the mixed performance, Mr Ombara notes in the report that the outlook for the next three months is “largely unpredictable.”

He says that concerns over the capping of interest rates and growing concerns over the rising public debt, which could trigger a downward review of Kenya’s sovereign credit rating, makes the outlook hard.