Kenya’s equities market lately underwent substantial losses, marking it as the poorest performer globally. The substandard performance continues: On November 10, 2023, the Nairobi Securities Exchange’s 20-share index stood at approximately 1420, plummeting to 1509 on September 29, 2023, reflecting a decrease of 6% over the six-week duration. During prosperous times, the index surpassed the psychological benchmark of 5000 points, for instance, registering at 5491 on February 23, 2015.Thank you for reading this post, don't forget to subscribe!
The stock market holds significance for the Kenyan public for various reasons. Primarily, up to 70% of Kenyans’ retirement savings are eligible for investment in the stock market which means that subpar market performance may impede pension funds from fulfilling their responsibilities. Furthermore, numerous Kenyan firms leverage the stock market to procure capital, and poor market performance discourages them from doing so.
Given these advantages, comprehending the reasons for stock market price oscillations is crucial. Here, I analyze some potential causes for the market’s underwhelming performance and propose feasible methods to reverse this trend.
what fuels markets
Stock values escalate in response to fresh insights that divulge potential risks faced by investors. Such insights may stem from discoveries made by an investor, or may be known to company insiders (albeit trading based on such information is typically illegal), or could be publicly announced by a body such as a central bank.
The recent insight may pertain to company-specific factors or broader market dynamics. Novel insights about a company often impact the company’s valuation without altering the market index. However, in smaller markets like Kenya, where the market index may mirror the presence of a few major companies (like Safaricom and KCB), a fluctuation in a firm’s stock value may trigger a discernible shift in the index value.
What’s amiss with Kenya’s stock market?
An essential risk element impacting the comprehensive market is sovereign (national) risk. Sovereign risk may be culpable for the ongoing offloading of shares by international investors in the Nairobi market in recent months.
When there are more sellers of shares than buyers, stock values and market indices decline. This is due to sellers needing to reduce their prices to attract potential buyers. In 2022, international investors disposed of approximately US$158 million (KES 24 billion) worth of shares in Kenya, marginally lower than the US$191 million recorded in 2020.
The divestment may indicate more profound political concerns influencing Kenya’s economy. These include concerns about potential unrest following the 2022 presidential elections as the country has previously encountered election-related violence.
The sell-off may also be influenced by economic factors. For instance, when US interest rates increase, as they have, international investors redirect their funds from emerging markets to US debt markets, a phenomenon known as flight to quality.
In actuality, informal evidence suggests that emerging stock markets hit their lowest levels between March and September 2023 due to anticipations of persistent high US interest rates.
Thirdly, the volatility in the stock market can be accounted for by the devaluation of the Kenyan Shilling. For international investors, investing in Kenyan stocks implies assuming risks associated with both the stock and the value of the Kenyan currency. If the value of the shilling falls relative to the investor’s home currency, such as the US dollar, it could nullify any gains on the stock and cause the investor to incur losses.
The Kenyan Shilling lost 21% of its value between September 13, 2022 and November 10, 2023. The primary reason for this is a reduced influx of foreign exchange due to capital flight and diminished export values.
Then there’s the mounting public debt in Kenya. It constitutes a cyclic issue: a depreciating shilling escalates the burden of outstanding debt on external lenders. Moreover, the increasing cost of servicing loans in foreign currencies stacks the supply of the shilling in currency markets, further attenuating it.
In an attempt to stem the depreciation of the shilling, rein in domestic inflation, and counter high US interest rates, like their global counterparts, the Central Bank of Kenya has opted to constrict the money supply.
Consequently, the policy interest rate, known as the central bank rate, has surged from 7% in March 2022 to 10.5% in November 2023. When interest rates elevate, the returns (yields) on debt instruments such as bonds also escalate, rendering them more appealing than stocks. This prompts investors to shift their assets from stocks to bonds, entailing a drop in stock values.
A significant recent development is the enactment of the Finance Act of Kenya in June 2023. This legislation imposes new levies and hikes existing taxes. The World Bank has cautioned that exorbitant taxation might discourage investments and intensify unemployment.
Consequently, tepid economic performance and concurrently, lackluster company performance (e.g., owing to diminished product demand) are anticipated. Investors project diminished cash flows (such as dividends) in the future due to prospects of weakened company performance, which is mirrored in the deflated valuation of the company today.
Anticipations concerning public debt also influence firms. Kenya is projected to procure more loans, which will elevate interest rates on government debt, making it more enticing for banks to lend to the government than to the private sector. Diminished private sector credit discourages private investments and depreciates company valuations.
What needs to be enacted?
There’s no swift remedy to the stock market plunge. Although stock market performance may be swayed by sentiment in the short term, long-term deliberation is more lucrative.
There exists a close correlation between the broader economy and the stock market. Therefore, as a financial expert, my only suggestion is: broaden and boost the economy.
There is compelling evidence of the long-term economic growth benefits of investing in human capital, fostering a nation’s entrepreneurial spirit, and investment in infrastructure. Consequently, government policymakers should absorb lessons from such evidence to propel the economy forward.
Critical here is the burgeoning need to reinforce the nation’s institutions. This will enhance governance and accountability, and also bolster investor confidence. These initiatives do not necessitate any intervention in the stock market.