East African stock markets feel pinch as foreign investors exit

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By JAMES ANYANZWA

East Africa’s growing competition for foreign capital inflows has opened regional stock markets to more international investors who risk their day-to-day operations.

The growth and performance of regional stock exchanges are at the mercy of foreign investors who dictate day-to-day trading activities, but are more susceptible to domestic and global shocks.

The Nairobi Stock Exchange and the Dar es Salaam Stock Exchange are facing falling share prices due to massive sell-offs by international investors who are liquidating their investments in emerging and frontier markets due to rising interest rates in United States and Europe, and geopolitical tensions caused by the ongoing war between Russia and Ukraine.

Emerging and frontier markets are also considered unattractive due to depreciating currencies, high inflation, growing political instability and rising debt levels following the default of Zambia and Sri Lanka. to their repayment obligations.

In May, Sri Lanka defaulted on repayment of its $12.5 billion Eurobond for the first time as the country grapples with its worst financial crisis in more than 70 years.

In 2020, Zambia defaulted on the repayment of its $42.5 million Eurobond, becoming the first African country to default on its debt during the Covid-19 pandemic.

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According to Oxford Economics Africa, as the Fed tightens policy, bondholders are demanding higher yields to invest in emerging markets.

“The resulting high interest charges will crowd out public investments by governments, such as the standard gauge railway and the Julius Nyerere hydroelectric dam, which are key priorities in Tanzania’s budget,” economists said. .

The NSE is currently 58% controlled by foreign investors who were net sellers from 2017 to 2021.

NSE data shows overseas sales have increased significantly in the first six months of this year, pushing trading to a historic low valuation of 10x price-earnings, making it the perfect time to investors to buy shares.

Last month, the benchmark fell below 1,700 for the first time in 20 years, indicating subdued activity and a free fall in prices in the 68-year-old stock market.

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Challenges

“I think there is a general sell-off by foreign investors. Unrest in Ukraine, rising interest rates in the United States, and Sri Lanka’s debt default are forcing foreign investors to leave emerging markets for what they perceive to be safer markets.” , said Paul Mwai, vice-president of NSE. Told East Africa last month.

The NSE recorded foreign investor participation of 60% to 70% between 2019 and the first half of 2021. But their activity on the exchange fell to 58% in June, from 64% in May this year, due to exits .

Also read: Nairobi Stock Exchange to step up trading by wooing retail investors

“Foreign investors were net sellers of equities over the period,” said NSE chief executive Geoffrey Odundo.

According to the DSE’s 2021 annual report, stock turnover fell by 82% to Tsh104 billion ($44.44 million) last year, from Tsh591 billion ($252.57 million) in 2020, largely due to the impact of the Covid-19 pandemic and declining overseas markets. investor involvement.

The majority of investors in the Rwanda Stock Exchange are domestic investors at 93.22%, followed by other East Africans at 5.7% and international investors at 1.08%.

In 2015, Kenya abolished a 75% restriction on foreign ownership in listed companies, allowing 100% ownership of a listed company.

The amendment to the Capital Markets (Foreign Investors) Regulations allowed the Cabinet Secretary to the Treasury to prescribe the maximum foreign ownership in an issuer or listed company deemed to be of “strategic interest”.

In 2014, Tanzania lifted restrictions on foreigners holding more than 60% of companies listed on the DSE. The move opened the ownership of some of the country’s largest and most profitable companies to non-Tanzanians, leading to an increase in foreign inflows into the DSE.

In Rwanda and Uganda, investors can hold as many shares of listed companies as they wish.

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