Kenya’s stock market has recently experienced significant declines, marking it as the worst-performing globally. This trend has persisted, with the Nairobi Securities Exchange 20-share index dropping from 1509 on September 29, 2023, to 1420 on November 10, 2023, reflecting a 6% decline over the six-week period. In contrast, during more prosperous times, the index reached above the psychological threshold of 5000, exemplified by its 5491 value on February 23, 2015.
The implications of the stock market’s performance are substantial for the Kenyan public on multiple fronts. Firstly, as much as 70% of Kenyans’ retirement savings may be tied up in the stock market, posing a risk to meeting pension obligations if the market remains weak.
Secondly, Kenyan companies often utilize the stock market to raise capital, and a sluggish market deters them from pursuing such avenues.
To comprehend the reasons behind the market’s underperformance, it is essential to explore the factors influencing fluctuations in stock market value.
This discussion delves into potential reasons for the market’s lackluster performance and proposes strategies to reverse this downward trend.
Market Dynamics: Stock prices react to new information that provides insights into the risks faced by investors. This information could be uncovered by investors, known by company insiders (though trading on such knowledge is typically illegal), or publicly announced.
Factors Affecting Kenya’s Stock Market:
- Sovereign Risk: The entire market is influenced by sovereign (country) risk. Recent months have witnessed international investors selling off shares at the Nairobi bourse, potentially due to concerns about post-2022 presidential elections and past election-related instability.
- Global Economic Factors: Economic considerations, such as increasing US interest rates, can lead international investors to withdraw funds from developing markets like Kenya, opting for the perceived safety of US debt markets.
- Currency Value: The depreciation of the Kenyan shilling against major currencies poses a risk for international investors, as it can erode gains on stocks when converted back to their domestic currency.
- Public Debt: Kenya’s rising public debt contributes to the weakening of the shilling, creating a cycle where a falling shilling increases the burden of debt and vice versa.
- Monetary Policy: The Central Bank of Kenya’s decision to restrict money supply, reflected in a rising central bank rate, has increased returns on debt assets, making them more attractive than stocks, thereby affecting stock prices.
- Legislative Changes: The enactment of Kenya’s Finance Act in June 2023, introducing new taxes and tax increases, has raised concerns about potential negative impacts on investment and employment.
Anticipated Challenges: Expectations of weaker economic and company performance, driven by factors like higher taxation and increased public debt, contribute to lower company valuations.
Recommendations: Addressing a stock market collapse requires a long-term perspective. Diversifying and growing the economy is crucial, emphasizing investments in human capital, fostering an entrepreneurial environment, and developing infrastructure.
Strengthening institutions is paramount to improving governance, accountability, and investor confidence, potentially alleviating the need for direct stock market interventions.