NSE sheds Sh95bn in days on profit-taking

Investors’ wealth at the Nairobi Securities Exchange (NSE) plunged Sh95 billion as local traders raced to profit from stocks bought cheaply a month ago.

The NSE’s market capitalisation closed at Sh2.15 trillion on Monday, down from Sh2.25 trillion last Thursday as a result of the profit taking, analysts said.

The drop followed a rally at the Nairobi bourse as local investors scrambled to buy shares that were trading at multiple-year lows following a sell-off by foreigners.

Before Thursday, the NSE had gained Sh433 billion from June 27 when the market value dipped to a five-year low of Sh1,820 trillion.

“It is probably just some profit taking. Safaricom moved from Sh23 to Sh32 so investors who bought low are crystallising their gains. Also, those who wanted to sell but thought prices were too low now have the opportunity,” said Muathi Kilonzo, head of equities at EFG Hermes Kenya.

The profit taking has been more pronounced in the Safaricom stock after the share rose from Sh23.15 on June 27 to Sh32 last Thursday, translating to gains of Sh354 billion.

The gain prompted investors, especially locals, to sell the telco’s shares over the past two days. The sell-off saw Safaricom’s shares drop to Sh30 at the close of trading on Monday or Sh82 paper loss.

This means Safaricom accounted for 86 percent of the bourse paper loss despite the firm closing its books on July 29 for dividend payment of Sh0.75 a share.

The telco accounts for 56 percent of the entire NSE market wealth, a dominance that is making it difficult for investors to gauge the performance of the bourse.

East Africa Breweries Limited (EABL) shed Sh2.17 billion in the two days, followed by KCB Group (Sh1.76 billion) and Equity (Sh1.5 billion).

Despite the two-day loss, investor wealth at the NSE has risen Sh338 billion in the past three weeks, following increased trading on Safaricom, Equity Group, EABL and KCB.

The four stocks, which account for three-quarters of the market’s total valuation, had fallen to 52-week lows towards the end of June on the back of sustained foreign investor selling.

Renewed local investor demand due to favourable entry prices has seen analysts forecast the market making gains despite the profit taking on Safaricom.

This is because there is still ample supply from foreign investors who have continued to move their capital to markets such as the US after an upward review of rates to fight rising inflation, which has raised returns on western bonds.

This inflationary pressure across the globe is a result of high energy and food prices following Russia’s invasion of Ukraine in February, which cut off wheat and fuel exports from the Black Sea region.

Supply chain constraints have also raised the cost of goods, largely due to higher shipping costs, feeding the inflationary pressure.

Similar price pressures have hit the Kenyan economy, where prices of essential food items such as flour and cooking oil have risen sharply, pushing inflation to a 58-month high of 7.9 percent.

Due to the flight of capital from emerging markets, local stock prices fell sharply in June.

The impact

Multiple stocks fell to 52-week lows, ushering in a buyers’ market where there were attractive entry prices offering good dividend yields and potential for capital gains once the market corrected itself.

“Foreign investors are still recording net outflows, which has provided a steady supply for local investors looking to get into the market, hence the rise,” said Melodie Ndanu, an analyst at Genghis Capital.

The impact of the four counters on the fortunes of the NSE has once again exposed the exposure risk facing the market, making it difficult for investors to gauge the true health of the stock market.

The performance of these four stocks often shows a market that is either in good health or in trouble, disregarding underlying fundamentals for a majority of counters.

For instance, a sharp gain in the Safaricom stock results in a significant jump in investor wealth and the NSE Al Share Index, even when other counters record limited movement, due to the telco’s massive footprint on the bourse.

These stocks also dominate the foreign trading desk and daily traded turnovers, giving foreign investors outsize influence on the bourse despite holding just 20 percent of the issued shares.

Local investor apathy has also helped cement this dominance by foreign investors.

Most local retail investors entered the market during the IPO boom of the mid-2000s, but rarely traded actively afterwards after cashing in on their stock or were locked in by low prices for the new market entrants whose fortunes dipped after listing.

Earlier this year, the Central Depository and Settlement Corporation (CDSC) revealed that nearly 97 percent of equity accounts used for trading at the NSE had been dormant in the past two years, meaning that only 61,000 of the 2.03 million share accounts at the depository have participated in trading over the period.