Preference for the five biggest stocks traded at the Nairobi Securities Exchange #ticker:NSE (NSE) has climbed to a 12-year-high, new data has revealed, an indication of growing appetite by investors placing their hopes on only a limited number of counters.
On the flip side, the trend also shows that investors are concentrating their risk. Statistics by the NSE show that as at Friday, five stocks — Safaricom #ticker:SCOM, Equity Bank #ticker:EQTY, East African Breweries Limited #ticker:EABL, KCB #ticker:KCB and Co-operative Bank #ticker:COOP— accounted for Sh1.85 trillion or 75.4 percent of all investor wealth at the bourse. This marks a sharp shift from 2008 when the five stocks controlled 52.5 percent of investor wealth on the NSE — pointing to heightened concentration of risk in the market as investors opt to put most of their eggs in only a few baskets as opposed to spreading risk across the 65 counters.
Concentration risk refers to the likelihood of investors losing money as a result of having a large portion of their holdings in a particular investment, asset class or a given stock relative to their overall portfolio. The performance of the five stocks has defied attempts by the Capital Market (CMA) to lower risks on investors by offering wider choices through new products and listings.
Genghis Capital senior research analyst Churchill Ogutu said the number of counters deemed viable for investment on the NSE has gradually shrunk over the last decade.
"There has been price erosion in many stocks that were once darlings of investors. Many stocks have seen their blue-chip status eroded, leaving investors with narrow options," he told Business Daily .
The top five stocks were the biggest contributors to the NSE’s historic gains last year and the trend shows no signs of stopping, going by analysts’ bets, especially on bank stocks after the removal of the interest rate cap late last year.
In 2008, the top five firms were controlling 52.5 percent of NSE wealth. This later dropped to 51.4 percent at the end of 2012. However, their dominance recovered and crossed the 60 percent mark in 2016 and has since deepened, closing the fourth quarter of last year at 73.4 percent, according to data from the CMA.
"(This is) the highest in the last four quarters, confirming their dominance in the Kenyan securities market. Market concentration remains a key risk within the Kenyan capital markets landscape," CMA says.
Attempts by the CMA to lower the […]