The sports category has moved to a new website.

Kenya’s stock market losses: An expert view on why & how to reverse it

Kenya’s stock market has suffered the steepest losses in the world, Professor Odongo Kodongo provides an expert view on why and how to reverse it.

President William Ruto during the listing of Laptrust Imara I-REIT at the Nairobi Securities Exchange.

Kenya’s stock market recently suffered steep losses, making it the worst-performing globally.

The weak performance has persisted: the Nairobi Securities Exchange 20-share index stood at about 1,420 on November 20, 2023, having fallen from 1,509 on September 29, 2023, a drop of 6% over the six-week period.

In better days, the index has risen above the psychological 5,000 mark: for example, it was 5,491 on February 23, 2015.

The stock market matters for the Kenyan public for several reasons. First, up to 70% of the retirement savings of Kenyans may be invested in the stock market. So the market’s weakness might inhibit retirement funds from meeting their pension obligations.

Second, many Kenyan companies use the stock market to raise capital and weak market performance discourages them from doing so.

Given these benefits, it is important to understand the reasons for stock market value fluctuations.

Here, I discuss some possible reasons for the market’s dismal performance and suggest possible ways to reverse the trend.

Stock prices move in response to new information that conveys signals about the risks faced by investors.

The new information may be something that an investor has uncovered, that is known by company insiders (although trading on that knowledge is usually illegal), or that is announced publicly by an authority like the central bank. New information may be about something unique to the company, or something that affects the entire market.

New information about a company often affects the company’s price without affecting the market index. However, in small markets such as Kenya’s, where the market index may reflect the presence of a few large companies (such as Safaricom and KCB), changes in the price of one firm’s stock may cause a noticeable change in the index value.

An important risk factor that affects the entire market is sovereign (country) risk. Sovereign risk may be responsible for the persistent selling off of shares by international investors at the Nairobi bourse in recent months.

When there are more investors selling shares than those willing to buy, share prices, and the market index, fall. This is because sellers must lower their prices to appeal to the few buyers.

In 2022, Kenya’s international investors sold about US$158 million (Sh24 billion) worth of shares, slightly lower than the US$191 million recorded during 2020.

The sell-off may indicate deep-seated political issues affecting Kenya’s economy. These include fears of possible instability post-2022 presidential elections. The country has previously experienced election-related violence.

The sell-off may also speak to economic factors. For instance, when US interest rates increase, as they have, international investors tend to pull their money out of developing markets and invest it in US debt markets, a phenomenon called flight to quality.

Indeed, anecdotal evidence suggests that emerging stock markets slumped to their lowest between March and September 2023 driven by expectations that US interest rates would remain high.

Third, the stock market jitters may be explained by the weakening Kenyan shilling. For international investors, investing in a Kenyan stock means taking a risk on both the stock and the value of the Kenyan shilling.

If the shilling falls in value relative to the investor’s domestic currency (like the US dollar), it may wipe out all the gains on the stock and cause the investor to lose money.

The Kenya shilling lost 21% of its value between September 13, 2022 and 10 November 2023. This has been largely attributed to capital flight and reduced inflow of foreign currency due to the low value of exports.

Then there’s Kenya’s burgeoning public debt. It’s the chicken-and-egg story: a falling shilling increases the burden of debt owed to outside lenders. And the rising cost of servicing debt in a foreign currency increases the supply of the shilling in the currency markets, weakening it further.

In an attempt to stem the slide in the shilling’s value, keep domestic inflation in check, and respond to rising US interest rates, the Central Bank of Kenya, like its counterparts globally, has chosen to restrict the money supply.

Consequently, the CBK rate, a policy interest rate that guides domestic loan pricing, has increased from 7% in March 2022 to 10.5% in November 2023.

When interest rates rise, returns (yields) on debt assets like bonds also rise, making them more attractive than stocks. This induces investors to move their money from stocks to bonds, causing a decline in stock prices.

An important recent development is the enactment of Kenya’s Finance Act in June 2023. The Act imposes new taxes and tax increases. The World Bank has warned that higher taxation may discourage investment and increase unemployment.

So there’s an expectation of weaker economic performance and, concomitantly, weaker company performance (due, for example, to lower product demand).

The expectation of weaker company performance causes investors to anticipate lower future cash flows (like dividends), which is reflected in lower company valuations today.

Expectations about public debt also matter for companies. Kenya is expected to borrow more, which will increase interest rates on government debt, making it more lucrative for banks to lend to the government than to the private sector.

Reduced private-sector lending discourages private investments and lowers company valuations.

There is no quick fix to a stock market collapse. Although stock market performance may be driven by sentiment in the short run, it is more beneficial to think long-term.

There’s a close relationship between the broader economy and the stock market. So, as a finance scholar, I offer only one recommendation: diversify and grow the economy.

There is clear evidence of the long-term economic growth benefits of investing in human capital, boosting a country’s entrepreneurial orientation and investing in infrastructure. To grow the economy, therefore, the government’s policymakers should draw from such evidence.

Importantly, the need to strengthen the country’s institutions has never been stronger.

This will have the effect of improving governance and accountability as well as investor confidence. With such actions, the stock market needs no intervention.

JOIN OUR PULSE COMMUNITY!

Eyewitness? Submit your stories now via social or:

Email: news@pulselive.co.ke

Recommended articles

Seasoned Kenyan innovator, Genz, pioneers world's first real-money game

Seasoned Kenyan innovator, Genz, pioneers world's first real-money game

How data privacy laws are changing banking services in Africa

How data privacy laws are changing banking services in Africa

How Moody's downgrade of Kenya's currency ceiling will affect citizens & businesses

How Moody's downgrade of Kenya's currency ceiling will affect citizens & businesses

Measures business owners can adopt to prevent looting during social unrests

Measures business owners can adopt to prevent looting during social unrests

Moving to a new house? How to tell if the prepaid token meter has been updated

Moving to a new house? How to tell if the prepaid token meter has been updated

Key achievements of late KRA boss Michael Waweru during Kibaki era

Key achievements of late KRA boss Michael Waweru during Kibaki era

Key tips for an amazing X Spaces experience ahead of Ruto's engagement with Kenyans

Key tips for an amazing X Spaces experience ahead of Ruto's engagement with Kenyans

Gov't Sh20billion bond misses target by 97%, signaling investor jitters

Gov't Sh20billion bond misses target by 97%, signaling investor jitters

UAP Insurance & other prominent businesses affiliated with ex-UoN Chancellor Joe Wanjui

UAP Insurance & other prominent businesses affiliated with ex-UoN Chancellor Joe Wanjui