NSE dips to Covid-19 lows as US rates batter stocks – Business Daily
Nairobi Securities Exchange (NSE) on the trading floor at the Exchange building in Nairobi on August 26, 2020. PHOTO | SALATON NJAU | NMG
The Nairobi Securities Exchange (NSE) has returned to lows last seen at the peak of the Covid-19 pandemic in 2020 on foreign investors’ flight in the wake of rate hikes in the US, wiping out Sh668 billion of investor wealth since the beginning of this year.
The market capitalisation has in the past week remained below the Sh2 trillion mark, a performance that was witnessed in August 2020, when Kenya was battling Covid-19 restrictions such as a nationwide curfew, which delivered layoffs, job cuts and business closures.
The value of all stocks stood at Sh1.968 trillion compared to Sh2.636 trillion at the start of the year in a period that has seen big counters like Safaricom and East Africa Breweries Limited (EABL) shedding more than a third of their values over the past 12 months.
The market is being weighed down by a reduced appetite for emerging markets after a jump in interest rates in developed markets such as the US.
The developed markets are currently battling high inflation that has forced their central banks to adjust rates upwards.
The US Federal Reserve benchmark rate now stands at a range of 3.0-3.25 percent, up three percentage points since the start of the year, and projections show it would rise to more than 4.5 percent at the end of 2023.
Read: US rate hike inflicts pain on Kenyan investors, firms
“The main reason is what is happening in global markets with rising interest rates. Investors are getting better returns in other markets,” said Kenneth Minjire, senior associate for debt and equity at AIB-AXYS.
“Our depreciating shilling and the risk profile of emerging markets, among them Kenya, has made investors exit the market despite strong fundamentals of top stocks.”
The Fed has raised short-term borrowing costs faster this year than any time since the 1980s to take the heat out of the economy and ease price pressures.
The benchmark US 10-year bond rate — a closely watched gauge of market inflation expectations over the next decade — has climbed to 3.89 percent, up from 1.52 percent at the start of the year. This has sent stocks tumbling across the globe as investors pulled out of equities on the expectations that inflation would surge.
Smaller markets like the NSE have taken deeper hits because investors, particularly foreigners, get attracted to the western bonds and equities that are viewed as safe havens in times of global uncertainty.
Foreign investors, who in recent years have accounted for more than half of traded turnover at the NSE, have been on a selling run this year, putting the large stocks on the back foot.
They withdrew a net of Sh19.2 billion from the market in the nine months to September, up from Sh2.05 billion in the same period a year earlier.
A massive sell-off was recorded in June when the foreigners offloaded stocks worth Sh5.04 billion, a move that saw the NSE market capitalisation drop to Sh1.82 trillion on June 27 — the lowest level in close to six years — from a high of Sh2.93 trillion recorded in August 2021.
Read: Foreign outflows surge to Sh12bn in stocks rout
Major exits have been witnessed on counters with a high foreign investor preference such as Safaricom, BAT Kenya, Equity Group, EABL and KCB Group, triggering steep price falls.
Safaricom is valued at Sh991.6 billion after its share price dipped to Sh24.75 from a high of Sh38.15 at the start of the year, translating to a paper loss of Sh536.9 billion over the period.
Equity Group has shed Sh31.13 billion, EABL Sh22.54 billion and KCB Sh19.12 billion.
Wealth at the bourse is concentrated in the four largest firms—Safaricom, Equity Group, KCB and EABL— which account for 70 percent of the total market capitalisation.
This means that any downturn in their share prices pulls down the NSE’s indicators significantly even when other smaller stocks may be performing well.
The forecast of the US lifting its benchmark policy rate above 4.0 percent and holding it there beyond 2023 in its bid to stamp out high inflation will continue to influence NSE performance.
The current high inflation in the advanced markets is a result of high energy and food prices following Russia’s invasion of Ukraine in February, which cut off wheat and fuel exports from the Black Sea region.
Supply chain constraints have also raised the cost of goods, largely due to higher shipping costs, feeding the inflationary pressure.