America rate hikes push NSE to biggest fall in history


Nairobi Securities Exchange (NSE) CEO Geoffrey Odundo. FILE PHOTO | DIANA NGILA | NMG

The value of shares at the Nairobi Securities Exchange (NSE) is on course to dip by the largest margin in history this year following rate hikes in the developed world and the Russian invasion of Ukraine.

The market capitalisation stood at Sh1.99 trillion at the close of trading on Thursday, down from Sh2.59 trillion on the first day of trading this year, translating to a loss of Sh597 billion.

The loss of Sh597 billion is the worst annual slide the market has recorded since its inception in 1954 and topples the Sh203 billion that was wiped out in 2020 due to Covid-19 economic hardships.

The market is being weighed down by a reduced appetite for emerging markets after a jump in interest rates in developed countries such as the US.

The developed markets are currently battling high inflation that has forced their central banks to adjust rates upwards, attracting foreign investors who have been fleeing emerging markets like the NSE.

The effects of the rate hikes emerged in April when the market witnessed the first round of foreign investors’ exit, triggered by the Russian invasion of Ukraine in February.

A major risk event such as the Russia-Ukraine war usually sees investors rushing back to bonds and the safest assets, hurting the flow of foreign investors to the NSE given that the foreigners traditionally account for over half of trading at the Nairobi bourse.

Big counters such as Safaricom, Equity Group and KCB—which are favoured by foreign investors—have so far shed more than Sh612 billion.

This means smaller and mid-sized stocks like Unga Limited, NCBA Group, Kapchorua and Car and General have helped cushion the bourse from further losses.

“Foreign investors are being attracted to higher returns offered in advanced markets as compared to the returns in the local bourse. This in turn has led to them dumping stocks for higher-yielding securities,” said Erick Musau the executive director of research at the Standard Investment Bank (SIB.)

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 United States Fed Fund rate - the rate at which financial institutions lend money to each other on a short-term basis - is ranging at between 4.25 and 4.5 per cent, up from 0.08 per cent at the start of the year.

The benchmark US 10-year bond rate — a closely watched gauge of market inflation expectations over the next decade — has climbed to 3.68 per cent, up from 1.63 per cent 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.

Major exits have been witnessed on counters with a high foreign investor preference such as Safaricom, Equity Group and KCB Group, triggering steep price falls.

Safaricom is valued at Sh989.6 billion after its share price dipped to Sh24.7 from a high of Sh37.95 at the start of the year, translating to a paper loss of Sh530.8 billion over the period.

The telecom operator accounts for 49.5 per cent of the entire Nairobi bourse.

Equity bank, the country’s biggest lender by market capitalization, has seen its paper value fall by 14 per cent or Sh28.3 billion and KCB has shed 16.2 per cent (Sh24.2 billion).

“In the local market, companies have posted robust performance mainly in the banking sector, the good performance, therefore, means that what is hurting the NSE is largely external and investors in strong companies should not worry much,” said Mr Musau.

“Company valuations are looking good at the moment and the growth momentum for giants like Safaricom are impressive with players announcing interim dividends.”

Wealth at the bourse is concentrated in the four largest firms—Safaricom, Equity Group, KCB and EABL— which account for 71 per cent 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.

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