East Africa’s Capital Markets Strengthen Amid Minimal Capital Flight from Gulf Conflict
Capital flight from emerging and frontier markets has remained largely subdued despite the economic repercussions of the ongoing Middle East crisis, offering a measure of relief for East Africa’s capital markets.
Impact of the Middle East Conflict on Emerging Markets
Global rating agencies and economists indicate that the external shocks stemming from the Middle East conflict have inadvertently favored emerging markets. The fiscal concerns, energy-driven inflation pressures, and banking stresses resulting from the crisis have primarily affected advanced economies. This shift has enhanced the relative standing of several large emerging market sovereigns within global investment portfolios. Moody’s has noted that these external shocks have improved the positioning of emerging markets in the eyes of investors.
Investor Sentiment and Market Dynamics
Razia Khan, Chief Economist for Africa and the Middle East at Standard Chartered Bank Plc, observed that sustained outflows from emerging and frontier markets have not been evident since the onset of the US and Israel’s military actions against Iran on February 28. Despite expectations of declining economic growth, market sentiment has remained resilient. Khan stated that while investors may become more cautious over time, the current data does not indicate a trend of sustained outflows from these markets. The future of this stability amid deteriorating economic conditions remains uncertain.
Shani Smit-Lengton, a senior economist at Oxford Economics Africa, pointed out that the foreign outflows from the Nairobi Securities Exchange (NSE) during the first quarter of 2026 can only be partially attributed to the Middle East conflict. She noted that the conflict has acted as a catalyst, prompting a risk-off sentiment among global investors who are retreating from frontier markets like Kenya in favor of safer, more liquid assets.
Performance of the Nairobi Securities Exchange
In the first quarter of 2026, the average foreign investor participation on the NSE declined by 4.73 percentage points, dropping to 32.27% from 37% in the previous quarter. However, the NSE All Share Index (NASI) saw a significant increase of 48.93%, rising to 194.82 points from 130.81 points in the same period in 2025. The volume of shares traded also rose by 19.67%, reaching 1,886.19 million shares compared to 1,576.20 million shares in the prior year.
Equity turnover more than doubled, climbing to Ksh58.39 billion ($452.63 million) from Ksh26.27 billion ($203.64 million). Jacques Nel, head of macro at Oxford Economics Africa, remarked that capital appears to be flowing back to emerging markets robustly. He noted that the MSCI Emerging Markets Index experienced a significant decline at the end of February and throughout March, but has rebounded strongly since early April, surpassing mid-February levels.
Broader Economic Context
While the South African JSE All-Share remains down year-to-date, advanced economy markets seem to be largely unaffected by the conflict. The Japanese Nikkei 225 has risen over 15% this year, and US stock markets are reaching all-time highs. Much of this performance can be attributed to investments in AI infrastructure, and the US economy continues to show resilience despite rising gas prices.
The Middle East conflict escalated on February 28, following joint military actions by the US and Israel against Iran after negotiations regarding Tehran’s nuclear program collapsed. In retaliation, Iran targeted US installations across the region, leading to the closure of the Strait of Hormuz, which disrupted global supply chains and pushed oil prices above $100 per barrel.
Since the onset of the conflict, the US dollar has strengthened against emerging-market and frontier-market currencies, increasing the local-currency costs of imported food, fuel, and medicine in economies reliant on imports. Moody’s has indicated that market pressures during this period have primarily manifested through yield adjustments rather than persistent sovereign credit repricing or prolonged financing stress.
According to Moody’s, large emerging markets have shown varying degrees of resilience to recent shocks, aided by relatively accommodating external market conditions that have helped these markets absorb successive external pressures since 2020.
Source: www.zawya.com
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Published on 2026-05-11 13:36:00 • By the Editorial Desk
