NSE beats African peers in half year as shilling strengthens

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Nairobi Securities Exchange (NSE) on the trading floor of the Exchange building. 

Photo credit: File | Nation Media Group

The Nairobi Securities Exchange (NSE) posted the highest returns among African bourses in dollar terms in the first half of the year, buoyed by a stronger shilling and higher blue chip share prices that saw investor wealth at the market rise by Sh291 billion in the period.

The appreciation of the shilling by 21.74 percent against the dollar this year has handed foreign investors extra returns on top of the capital gains enjoyed on blue chip stocks at the NSE, helping them beat other markets where currencies have not performed as well against the greenback.

The Kenyan market had a return of 50.4 percent according to the Morgan Stanley Capital International (MSCI) Index for the six months to June, beating Zimbabwe (34.4 percent), Mauritius (8.0 percent) and Morocco (6.8 percent) which were the other top African performers in the frontier and emerging markets indices.

South Africa, Côte d'Ivoire, Senegal and Tunisia had returns of between 2.9 and 5.9 percent, while Egypt and Nigeria’s six-month dollar returns were in the negative at -33 percent and -73 percent respectively.

The MSCI index is a key source of investment information for foreign investors, tracking the top stocks in selected countries based on their market capitalisation, liquidity and financial performance.

 In Kenya, the MSCI tracks four blue chips—Safaricom, Equity Group, EABL and KCB Group— which together account for 62 percent of the NSE’s total market capitalisation of Sh1.71 trillion.

In the six months to June 2024, Safaricom’s stock price gained 24.5 percent to Sh17.30, while Equity’s was up by 25.6 percent to Sh42.25. EABL’s stock was up by 28.7 percent to Sh146.75, and KCB’s share gained 42.7 percent to Sh31.25.

These gains on the NSE’s four largest stocks helped it record a Sh271.62 billion increase in investor wealth in the period. The benchmark NSE 20 Share Index was up 10.3 percent to 1,656.50 points, while the all-inclusive NSE All Share Index gained 18.9 percent to 109.49 points.

In the comparative period in 2023, the NSE had shed Sh319.8 billion in market capitalisation, while the NSE 20 Share Index and the All Share Index were down by six percent and 16.1 percent respectively.

Foreign investors have meanwhile recorded net inflows of Sh749 million in the six-months to June 2024, compared with net outflows of Sh15.41 billion in the first half of 2023.

The sentiment around the market has however improved this year, mirroring the wider economy where investor jitters over the shilling and the country’s foreign debt sustainability have eased following the successful refinancing of the $2 billion 2014 Eurobond that matured last month.

Inflation has also eased since the beginning of the year, falling to 4.6 percent in June 2024 from 6.63 percent in December 2023.

For foreign investors, the weakening of the shilling and lack of access to dollars were the biggest concerns going into 2024, negatively affecting their participation and inflows into the market.

 These fears eased from the second quarter of the year after the refinancing of the Eurobond and Central Bank of Kenya (CBK) led reforms to the forex interbank market.

 The resolution of the dollar supply hitches resulted in the removal in April and May of restrictions placed on the Kenya stock market in 2022 by the MSCI and fellow global index provider Financial Times Stock Exchange (FTSE) Russell Index.

 The two index providers had put the NSE under watch after investors reported difficulties accessing dollars from the local forex market to repatriate dividends and proceeds of share sales.

These cautions to foreign investors discouraged inward foreign flows into the Kenyan market, while those already holding shares refrained from trading to avoid the hassle of seeking dollars in a difficult forex market.

The weakening of the shilling between 2022 and 2023 also discouraged trading, as investors sought to avoid exchange losses upon exit.

Foreign investors usually exchange their dollars for shillings when entering the market, and buy dollars when exiting for repatriation abroad.

If the shilling strengthens against the dollar between the period of entry and exit, they end up with an exchange rate gain since they would get more dollars for their shillings when buying hard currency for repatriation of gains abroad. On the other hand, a weakening shilling hands them an exchange loss on their investment.

 A foreign investor entering the Kenyan market at the beginning of 2024 with an investment of $100,000 would have Sh15.65 million in shilling equivalent going by the exchange rate of Sh156.64 to the dollar at the beginning of January.

Even without a capital gain on their shares, the value of the investment in dollar terms had gone up to $120,800 by the end of June due to the appreciation of the shilling to Sh129.52 against the dollar in the period.

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