US firm, Morgan Stanley blocks Kenyan companies from joining the global index over dollar shortage.
In the most recent setback for local Kenyan companies looking to sell shares to overseas investors, Morgan Stanley Capital International (MSCI), an international trading index company, has prohibited new Kenyan companies from joining its global stock market platform, citing dollar shortages and financial turbulence facing Kenya.
The August 2022 decision of the American investment advisory firm, whose analysis is influential in helping the global investment community make major decisions about investing in African frontier markets, to cease conducting periodic reviews of the dollar-denominated MSCI Kenya Index has been extended.
This decision will also affect Bangladesh, Egypt, and Nigeria.
According to the US company, market players’ input over the declining liquidity in Kenya’s foreign exchange market—which made it challenging for foreign investors to withdraw their capital—was the basis for their decision.
Periodic reviews—which take place on a quarterly basis in February, May, August, and November—allow for the addition or deletion of component businesses as well as adjustments to the index’s weighting.
This enables overseas investors to make well-informed investment decisions by providing them with an up-to-date view of the Nairobi Securities Exchange’s (NSE) current situation. Because a review freeze effectively functions as a caution against the afflicted market, it inhibits foreign inflows.
When announcing the “special treatment” of the Kenyan index in August 2022, the MSCI said that “such changes include migrations between size segments, additions of newly eligible securities, including sizeable IPOs”.
It also stopped making updates in the Foreign Inclusion Factor (FIF), which indicates the proportion of issued shares that are deemed to be available for purchase in equities markets by international investors.
The November 2023 review of MSCI indices affirmed the continued freeze on Kenyan index reviews.
“In light of currently observed market accessibility issues, MSCI will not implement changes as part of this Index Review for any securities classified in Bangladesh, Egypt, Kenya, or Nigeria…” said the MSCI.
The MSCI Kenya Index which measures the performance of large and medium-sized firms, tracks three Kenyan blue chips—Safaricom, Equity Group, and EABL— exposing them to foreign investors who have often dominated trading on these counters.
KCB Group is domiciled in the MSCI Frontier Markets Small Cap Index.
The review moratorium means that even if other listed firms get to meet the criteria for inclusion in these indices, they will remain frozen out until the restriction is lifted.
This year, the performance of the Kenyan market as measured by the MSCI, has been the worst among the 10 African bourses tracked on the frontier and emerging markets indices, indicating some of the negative effects of the caution placed last year.
Kenya’s index has retreated by 47 percent, ahead of Zimbabwe (-25 percent), Nigeria (-23 percent), South Africa (-7.0 percent) and Tunisia (-4.0 percent). Others including Egypt, Senegal, Morocco, Ivory Coast, and Mauritius have recorded positive returns of between four and 56 percent.
A combination of the weakening of the shilling and the share price decline on constituent stocks has helped lower the performance of the Kenyan index.
Since the beginning of the year, the shilling has depreciated against the dollar by 19.4 percent to exchange at 152.97 units, as per the official Central Bank of Kenya (CBK) rate.
Investor wealth as measured through market capitalisation dropped by Sh541.3 billion in the period to stand at Sh1.44 trillion.
Safaricom, which carries the biggest weight on the MSCI Kenya Index as well as the local shilling indices due to its status as the NSE’s largest stock by market capitalization, has seen its share price fall by 39 percent since the turn of the year to Sh14.
Equity is down 18.5 percent in the period, while EABL has shed 34.1 percent this year.
The stock of the three companies has come under pressure from persistent foreign investor selling, despite being among the few at the bourse that exercise a consistent policy of paying out dividends.
Overall, in the nine months to September, the NSE reported net foreign outflows of Sh18.6 billion, although this was inflated by the Sh22.7 billion March 2023 purchase of additional EABL shares by Diageo.