NSE Market Turbulence: Foreign Capital Flight Amid Global Monetary Policy Shifts

The Nairobi Securities Exchange (NSE) experienced its most volatile trading week of the year during the third week of September 2025, as international investors orchestrated a massive capital flight that sent shockwaves through Kenya’s equity markets. The dramatic sell-off, triggered by anticipation of U.S. Federal Reserve monetary policy changes, marked the steepest decline in market indices since the Trump administration’s tariff announcements earlier this year.

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Record-Breaking Foreign Exodus

Foreign investors sold KSh 3.65 billion worth of equities against purchases of just KSh 684 million during September 15-19, creating a staggering net outflow of KSh 2.96 billion. Wednesday, September 17, emerged as the epicenter of this financial earthquake, with a single-day withdrawal of KSh 2.8 billion—representing the largest daily outflow recorded in 2025.

The scale of this exodus becomes even more apparent when viewed in broader context. Three weeks into September, cumulative foreign exits reached KSh 4.67 billion, effectively wiping out August’s KSh 1.65 billion inflows nearly three times over. This dramatic reversal has reshaped the investment landscape for Kenya’s premier stock exchange.

Market Performance Deterioration

The foreign capital flight triggered a synchronized decline across all major NSE indices—a phenomenon not witnessed since Week 29 (ending July 18). The NSE 20 Index plummeted 3.8%, the NASI dropped 2.9%, the NSE 10 fell 2.9%, and the NSE 25 retreated 2.7%. Market capitalization contracted by KSh 81.7 billion to KSh 2.73 trillion.

Despite the brutal weekly performance, several individual stocks managed to buck the trend. Limuru Tea emerged as the week’s top performer with a 9.9% gain, followed by Olympia Capital at 8.3%, Unga Group at 6.7%, East African Portland Cement at 6.0%, and Eveready at 6.0%. However, these gains were overshadowed by significant losses elsewhere, with Home Afrika plunging 33.7%, CIC Insurance falling 20.0%, and Umeme dropping 12.6%.

Federal Reserve Catalyst

The market turmoil coincided with the U.S. Federal Reserve’s decision to cut its benchmark lending rate by 0.25 percentage points to a range of 4.0% to 4.25% on September 17, 2025. This marked the first rate cut since December 2024, signaling a shift in monetary policy priorities from inflation control to labor market support.

The Fed’s decision was driven by cooling labor markets, with August payrolls adding only 22,000 jobs and unemployment rising to 4.3%. Markets had widely anticipated this move, with traders pricing in over 80% probability of a rate cut ahead of the announcement.

Global Impact on Emerging Markets

The Fed rate cut triggered significant movements in global currency markets, with the dollar index softening and emerging market currencies rallying. Gold broke out to all-time highs near $3,680-3,700 per ounce, while investors repositioned their portfolios away from dollar-denominated assets.

For emerging markets like Kenya, the Fed’s decision presents both opportunities and challenges. While a weaker dollar could potentially boost exports by making Kenyan goods more competitive, it also complicates monetary policy management and exchange rate stability.

Kenya’s Economic Resilience Context

Despite the market volatility, Kenya’s broader economic fundamentals remain relatively stable. Kenya’s real GDP grew 4.7% in 2024, down from a revised 5.7% in 2023, with notable growth in the Financial & Insurance Activities sector (7.6%), Transportation and Storage (4.4%), and Real Estate (5.3%).

Looking ahead, Kenya’s economy is projected to grow 5.3% in 2025, supported by improvements in the agricultural sector, government infrastructure investment, private sector growth due to easing domestic interest rates, and enhanced regional trade. Foreign exchange reserves increased 9.9% to $11.1 billion in 2025 from $10.1 billion in 2024.

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Investment Climate and Structural Reforms

Kenya has been implementing significant reforms to attract foreign investment, including the establishment of special economic zones designed to enhance the country’s attractiveness for export-oriented and industrial investments in technology, infrastructure, agro-processing, and financial services.

By 2023, Kenya had become Africa’s largest start-up hub by both funds invested and number of projects, reflecting the country’s growing appeal as a technology and innovation center. However, foreign investments in Kenya remain relatively weak considering the size of its economy, with total FDI stock at $10.4 billion as of 2022, representing just 9.5% of GDP.

Banking Sector Dominance

The banking sector dominated trading activity during the volatile September 17 session, accounting for 72% of total value traded. Equity Bank led with trades worth KSh 1 billion, followed by KCB (KSh 561.6 million) and Stanbic Holdings (KSh 201.9 million).

This concentration in banking stocks reflects both the sector’s importance to Kenya’s economy and international investors’ focus on large, liquid securities when executing rapid portfolio adjustments.

Historical Context and Profit-Taking

The September outflows represent a sharp reversal from August 2025, when foreign investors made net purchases of KSh 1.6 billion—the highest inflow since 2019. This four-year high in foreign investment had marked a significant turnaround for the NSE, which had experienced prolonged periods of foreign exits since 2019.

Analysts attribute the recent selling pressure to profit-taking behavior, with Standard Investment Bank analyst Melodie Ndanu suggesting that “the stock hit a certain price point at which portfolio managers had planned to sell.”

Market Outlook and Recovery Prospects

Despite the severe weekly decline, the broader NSE market remains near record highs. Year-to-date performance continues to be impressive, with the NASI up 40.5%, the NSE 20 gaining 44.4%, and market capitalization expanding by nearly KSh 794 billion.

NSE Head of Trading David Wainaina remains optimistic about the market’s fundamental strength, noting that “based on that fundamental performance of the economy, this performance in our view will be extremely sustainable towards the end of the year. We expect to close the year on a high.”

Global Monetary Policy Implications

The Fed’s easing cycle is expected to continue, with projections indicating a target federal funds rate of 3.6% by end-2025 and 3.4% by end-2026. This sustained accommodative monetary policy environment could eventually benefit emerging market assets like those on the NSE, as investors seek higher yields outside traditional developed markets.

J.P. Morgan’s analysis suggests that rate cuts during a slowdown (rather than a slump) typically support global risk assets, potentially creating opportunities for emerging market equities as financial conditions loosen globally.

Risk Factors and Challenges

Kenya’s economic outlook faces several risks, including climate shocks, debt-servicing pressures, internal political instability, and geopolitical uncertainty. The fiscal deficit, while projected to narrow to 5.0% of GDP in 2025, remains a concern alongside public debt levels.

Additional challenges include the shilling’s 30% weakening against the U.S. dollar from 2014 to 2024, unpredictable weather patterns affecting the crucial agricultural sector, and the need to maintain investor confidence while managing debt obligations.

Looking Forward

The battle between foreign selling pressure and domestic buying interest will likely determine the NSE’s trajectory in the final quarter of 2025. While the September volatility represents a significant short-term challenge, Kenya’s underlying economic resilience, ongoing structural reforms, and position as East Africa’s financial hub provide a foundation for potential recovery.

Market participants are also anticipating upcoming initial public offerings (IPOs), which could inject fresh liquidity and investment opportunities into the exchange.

As global monetary policy continues to evolve and investors reassess risk-return profiles across different markets, the NSE’s ability to attract and retain foreign capital will depend on both macro-economic stability and the successful execution of structural reforms designed to enhance Kenya’s investment attractiveness.

The September market turmoil serves as a reminder of emerging markets’ sensitivity to global monetary policy shifts, while also highlighting the importance of building robust domestic investor bases and maintaining strong economic fundamentals to weather periods of foreign capital volatility.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

24th September, 2025