The dominance of the Safaricom stock at the Nairobi Securities Exchange (NSE) has grown in recent years, to the point where the company’s market capitalisation now accounts for 60 percent of the bourse’s total valuation.
The Capital Markets Authority (CMA) has repeatedly expressed concern about the outsized share of the NSE’s total valuation that is held by Safaricom and four other large stocks, namely EABL, Equity Bank, KCB and Cooperative Bank.
This, the regulator has been noting, has raised the market concentration risk at the bourse.
This current state of affairs is certainly not the fault of Safaricom or the other large companies. Investors will always go for companies that exhibit solid fundamentals, both on the balance sheet and in their business models.
The solidity has driven a continuous demand for the shares of the telco, in turn pushing its price up from lows of Sh2 in 2011 to the current Sh36.50.
While the success of the Safaricom stock is a positive for the bourse, there is also a flip side which should worry policy makers at the exchange and the markets regulator. The dominance of the single stock is a pointer to a lack of quality elsewhere. The NSE has for the past few years been struggling to attract quality listings of the type that so excited investors in the 2005-2011 period.
Recent listings have consisted of small firms in the growth and enterprise segment, while a number of medium-sized firms have been delisting from the bourse.
These actions, combined with the deepening of the Safaricom dominance, should serve as a wake-up call for the bourse that it needs to bring on board high quality listings.
More effort must be put in to convince large firms to go public. In the past, we saw the State set the ball rolling by listing large, fundamentally solid corporations such as KenGen and Safaricom. This served to signal its confidence in the market to the private sector, encouraging other firms to list.
The CMA has said previously that it was looking to convince the Treasury to take one or more State-owned firms public.
The NSE desperately needs such a listing to revive its fortunes and reverse the worrying trend of the market being overexposed to the fortunes of a single company.
