This year, the Nairobi Securities Exchange (NSE) has taken a hit as foreign capital flows back to the safety of western markets, spooked by the Russia-Ukraine conflict and rising prices that have forced major economies to raise interest rates.
Local investors have been bearish on the market for a longer period, leading to lower traded turnover which has hurt the commissions earned by market intermediaries and depressed share prices.
Investors have instead pushed their money into other investment classes such as government bonds, leaving market players with the tough task of enticing them back into equities.
The Business Daily spoke to Gregory Waweru, the chief executive officer at SBG Securities Kenya on the state of the sector, the market and the general investment climate in the country ahead of the elections.
WE HAVE SEEN SUSTAINED FOREIGN INVESTOR OUTFLOWS FROM THE LOCAL BOURSE. IS THIS A SHORT-TERM SENTIMENTAL SHIFT OR DOES IT FEED INTO THE LONGER-STANDING ISSUES WE HAVE SEEN IN THE MARKET?
Structurally, the main issue with foreign investor sentiment is global. The risk-off sentiment has triggered selling across many frontier markets. For that reason, Kenya will not be isolated.
In terms of the longer-term view, some constructive investors look at investment opportunities despite the challenges that are currently evident from a general regional point of view or frontier market standpoint.
There is still space to see investors continue participating, perhaps not at the level we were seeing five to 10 years ago because there have been structural shifts in how investors allocate weights to markets in Sub-Saharan Africa.
THE DOWNTURN IN THE MARKET HAS BEEN PROLONGED. HOW CAN IT BE REINVIGORATED?
The answer lies in looking at the local investment potential. We face low participation in the market by local retail and institutional investors, and I think the solution will come from getting increased participation from local investors.
However we also have fixed income where there is a significant investment, so the question is how we can ensure that all the asset classes available domestically have the right level of participation by all the investor categories.
We have seen evidence from other markets, particularly in North Africa where local investment in terms of proportion is much higher than what we observe in the other markets in sub-Saharan Africa.
Crowding investors back into the market will come not just from a traditional investor education standpoint, but also making sure the opportunities are attractive enough for those who have put their money in other assets.
We have to make them see the benefit of increasing their allocated savings and diversify that away from cash into listed companies.
HOW IS THE HEALTH OF THE STOCKBROKING SECTOR, ESPECIALLY NOW THAT COMMISSIONS FROM EQUITIES HAVE GONE DOWN?
The industry and the competitive environment have become tougher, exacerbated by the fact that there is a high degree of market concentration within a few companies in terms of average daily trading liquidity.
The whole industry is looking at ways of ensuring we remain sustainable, hence why you see increased activity on fixed income while the equities market remains subdued.
Time will tell whether that shift will result in revenue compensation, but at the same time players are looking to diversify their product mix and revenue mix across other licenced activities that will help them remain competitive.
Revenue diversification comes from a product standpoint, and whether we are adding value to the modern, increasingly sophisticated investor, basically looking at what new opportunities we can bring to our clients to make money for ourselves and also to help them make money as well.
FIXED INCOME IS A BRIGHT SPOT, BUT WE ARE SEEING THE EAST AFRICAN BOND EXCHANGE (EABX) COME IN. THE NSE HAS BEEN VOCAL ABOUT THE DISRUPTION IT WILL CAUSE ITS BUSINESS, BUT WHERE DO YOU INTERMEDIARIES VIEW THIS DEVELOPMENT?
It is still a bit early in the process. We are still evaluating and thinking through the consequences of having an alternative marketplace for bonds.
At this stage, we feel there is a concern about having a different construct for bond trading activity outside of the traditional way which we have known for many years.
However, in as much as it may appear to be a threat, it may also be an opportunity for us, which is why we want to carefully and in a very balanced way look at what the true implications of this move are and whether there is a way for us to seek nay benefits from EABX.
There are many things that are still unclear at this point, for example, whether we could participate as market makers and the true opportunities of that market as opposed to saying it’s a complete loss of business. If there is an opportunity we want to be part of it.
WE HAVE SEEN FINANCIAL INCLUSION IN KENYA GO UP MASSIVELY IN THE PAST DECADE. IS THIS TRANSLATING TO THE FORMAL FINANCIAL MARKETS LIKE THE STOCK EXCHANGE OR IS IT JUST LIMITED TO THE EXCHANGE OF CASH?
The average investor is becoming increasingly sophisticated and better asset allocators. They are no longer just doing plain-vanilla investments.
We have seen a growing appetite for instance for fixed income investments, which was not as strong as it is today a few years ago, and we have also seen licensing of more entities offering offshore investments.
The investment opportunities and menu available to investors have expanded and it has also brought in a new class of investors who are looking at these alternative investment opportunities.
RECENTLY, YOUR FIRM HELD AN INVESTMENT FORUM. FROM THE DISCUSSIONS THEREIN, WHAT IS THE PREVAILING SENTIMENT CONCERNING INWARD INVESTMENTS IN KENYA?
The main issues are around macroeconomic challenges. Investors want to see how well the country can navigate these challenges, especially in a period when there is political transition.
Globally there are other overarching themes to do with elevated risk-off environment, particularly now that developed market central banks are hiking rates. Inflation is also a global issue that is playing a part in this conversation.
The investment climate from an international investor lens is one of a risk-off view.
However, looking at other factors, no one is complaining about corporate earnings growth for instance. And the momentum in this growth is picking up, while companies and banks have resumed paying dividends which is a positive signal.
For those looking to invest in Kenya, which sectors and opportunities are they showing an interest in?
In terms of investment allocation, one of the observations we made is that there is a high degree of concentration in terms of preferred sectors and also at a country level.
The telecommunications, technology and banking sectors are the ones that generally stand out and seem to be at the top of investors’ minds, while on the consumer and industrial side you begin to see investors looking at opportunities more selectively.
Tech has been a big theme globally for a while, and coming out of the pandemic it has benefitted significantly.
HOW IS THE DEALS PIPELINE THIS YEAR COMPARED TO LAST YEAR?
There has been no big difference in terms of deals potential year on year, with the exception being that we are in a political season where generally some issuers or corporates front load or delay activities until after the election period.
The pipeline will show itself better afterwards because you will probably see some of the issuers coming up in the remaining months after the polls.
But there is still work to do in the deals pipeline though in terms of bringing in potential issuers to the market.