The dominance of a handful of large firms at the Nairobi Securities Exchange could distort equilibrium in the market in the event that they decide to sell off because of concentration risks according to the CBK.
In its Kenya Financial Sector Stability Report, the regulator cites other risks as dominance by foreign investors and the high concentration of Treasury securities in the Bonds market, cautioning that the shocks could either originate domestically or from foreign economies. In the period under review, government bonds trading accounted for more than 99 percent of the fixed income market segment.
“As at December 2018, the top five companies accounted for 65.82 percent market capitalization from 64.83 percent in 2017, of which, Safaricom accounted for 42.31 percent. Secondly, foreign investors accounted for 63.28 percent of total equity turnover in 2018 compared to 63.23 percent in 2017.
“While this is positive news, abrupt sell-offs by this investor category can lead to excess volatility, as noted in the first half of 2018 following an interest rates hike in the advanced economies and emerging markets and the consequent search for yield,” CBK noted.
Low liquidity in the equity market, limited issuance of corporate bonds, low uptake of new and existing products and services and crypto-assets are among the related challenges that the security exchange could run into. In 2018, equity turnover and market capitalization largely influenced foreign equity outflows Nairobi Security Exchange.
Capital Markets Authority, predicts that new listings of state-owned enterprises and plans to roll out a product uptake and market deepening strategy targeting private companies to list on the NSE could breath more life into the markets.