Why DSE trading fell sharply in first half of 2023

Dar es Salaam. Global economic uncertainties, including trade tensions and geopolitical risks, contributed to more cautious investor sentiment towards frontier markets such as Tanzania in the first half of 2023.

As a result, trading at the local equities market declined, with total turnover falling from Sh75.05 billion recorded in the first half of 2022 to Sh49 billion recorded during the same period in 2023.

That, according to market data from the Dar es Salaam Stock Exchange (DSE), represents a 34.5 percent decline in liquidity.

Analysis by The Citizen also indicates that the ongoing fluctuations in global financial markets have prompted many foreign investors to adopt a risk-averse approach and reassess their investment strategies.

Data shows that during the period under review, the turnover from shares bought by foreign investors also dipped by over 58 percent.

From January to June last year, foreign investors bought shares valued at nearly Sh49.09 billion, while during the same period in 2023, they injected just Sh20.44 billion into the equities market.

Several factors have likely influenced this downward trend, according to analysts, including adjustment of interest rates from developed markets, dollar shortage issues, inflation and trade risks associated with frontier markets like the DSE.

Russia’s invasion of Ukraine, the worldwide energy crisis, on-and-off lockdowns in China and pandemic-era supply bottlenecks have come together to produce an explosive cocktail of spiralling prices.

As a result, central banks across the globe are rushing to raise their key interest rates in a bid to tame high inflation.

“It created an opportunity cost situation because many foreign investors rushed to those developed markets for safe investments and caused a downturn in the level of investments injected to the least developed markets,” said Orbit Securities investment analyst Ammi Julian.

Chief executive of the financial firm Exodus Advisory Ramadhan Kagwandi echoed that the slowdown of the foreigners’ activities had nothing to do with domestic economic performance but rather the financial adjustments globally.

“This year we have seen foreigners offloading investments from the risk markets to more stable and developed markets as they try to balance their portfolio with the global interest rates adjustments,” he said.

Mr Julian added that the issue of shortage of dollars in many African economies also played a factor, as its implications were a pinch to financial markets across the region.

“Foreign investors’ assessment can consider region-wise, and that can have implications for individual markets. Thus issues like the high inflation rates in countries like Ghana and the technical default in foreign debt level can affect how many foreigners review the rest of the region,” he said.

Vertex Capital markets manager Ahmed Nganya said another factor was the decline in performance for the Cross-Listed counters in the first half of 2023, which had a negative impact on the overall performance of the all-share index (DSEI).

“The decline in the DSEI might have made foreign investors lose trust in the Dar Bourse,” he said.

Mr Nganya says fear of currency fluctuation risks for the Tanzania shilling had also played a part.

“If investments were to be made in the Tanzanian market it would have been in Tanzanian shillings such that may impose a currency translation risk as returns on investments might decline if local currency was decline even further,” he said.

However he said there are several initiatives taken that would put the local financial market in the right direction, including the recent adoption of the Interest rate-based monetary policy to further control inflation in the economy, Imposing forex directive to benefit retailers with cheaper access to foreign currency and the use of long term tenure bonds to absorb excess liquidity in the market.

According to the analysts, the drop in total turnover and foreign purchases serves as a wake-up call for market participants and policymakers.

They suggested that the slowdown during the first half highlights the need for proactive measures to stimulate market activity, especially among local retail investors.