Investors at the Nairobi Securities Exchange (NSE) have booked paper losses of Sh80 billion in the first nine months of the year, as the market hit a five-year low on the back of an interest rate cap that has decimated banking stocks.
The bear run that has gripped the market since the second quarter of last year has seen just six out of the 64 actively traded stocks in the market record a price gain in the past nine months, while 49 have recorded double-digit percentage declines in valuation.
The paper losses have hit the banking sector hardest, bleeding Sh183 billion in market capitalisation.
The negative impact has only been mitigated by a gain of Sh146 billion in Safaricom’s valuation, which has made a year-to-date price gain of 22.4 per cent.
“The market continued reeling from after-effects of investor reaction to the setting of caps on commercial bank lending rates with banking sector counters sustaining a bearish trend….the investors are, however, banking on the recent dovish signal by the Central Bank (in form of a CBR cut by 50 basis points to 10 per cent) to help stir the market in the coming quarters,” said research analysts at Stratlink Africa in their Kenya market update for October 2016.
On August 24, when the new interest rate cap law was signed, the NSE 20-Share Index was at 3,462 points, 14 per cent down in the year-to-date, but in the one month under the new law the decline has accelerated to 20 per cent at 3,243 points.
NSE data shows that the KCB, Equity Holdings, Barclays Kenya and Co-operative Bank stocks have suffered the biggest losses in market capitalisation, at Sh48.3 billion, Sh35 billion, Sh29.6 billion and Sh27.6 billion respectively.
Commercial and services stocks have collectively shed Sh27.3 billion in capitalisation in the nine months, while those in energy and in construction sectors have shed Sh20 billion and Sh21.6 billion respectively.
Insurance stocks are Sh16.4 billion in the red this year, agriculture Sh7 billion and investment Sh5.7 billion.
The market has faced other multiple pressures in the first three quarters of the year, however, including uncertainty relating to the political environment ahead of next year’s General Election, a tighter monetary policy that has reduced the cash available for investment and foreign investor jitters arising out of the Brexit vote.
The UK’s decision to leave the European Union, for example, has led to some foreign investors adopt a risk-averse stance with regard to assets in emerging and frontier markets like Kenya.
Investors have also picked up negative signals in relation to some of Kenya’s policy moves, with some damage being done by a provision in the Companies Act that compelled all foreign companies registering in Kenya to reserve at least 30 per cent of their shareholding to Kenyans.
“The performance of the market so far has reflected the monetary policy and the real economy. We therefore cannot expect a recovery just yet, considering that the main drivers—foreign investors—have become spooked following the introduction of the foreign ownership rule-- which although now removed, has already done some damage,” said ABC capital corporate finance manage Johnson Nderi.
“The bank amendment act capping interest rates has also raised concern, by causing fear that we might yet see other controls being introduced into what is supposed to be a free market economy, the worst being foreign exchange controls” said Mr Nderi.
Although it would not directly hurt stock market investors, the foreign ownership limit rule suggested hostility to foreign ownership of Kenyan firms. The law has however been repealed in the Finance Act of 2016, effective January 1, 2017.
The move by CBK to ease monetary policy in the September 20 MPC meeting could however work to the advantage of the stock market, especially in reviving trading by local investors who have been largely quiet this year.
The MPC noted that private sector credit was not growing hence the move to cut the CBR from 10.5 to 10 per cent.
Should the economy respond through an increase in borrowing and spending, it is expected that some of the extra cash in circulation will find its way into the stock market.