The Nairobi Securities Exchange (NSE) has fallen to lows last seen at peak of the Covid-19 pandemic in 2020, wiping out Sh627.5 billion of investor wealth since the beginning of this year.
The market capitalisation dropped below the Sh2 trillion mark for the first time since August 2020, when Kenya was battling Covid-19 restrictions like daily nationwide curfew, which delivered layoffs, job cuts and business closures.
The value of all stocks stood at Sh1.965 trillion compared to Sh2.636 trillion at the start of the year, while the NSE main index has dropped to a 19-year low on foreign investors’ flight.
The NSE-20 Share Index closed at 1,644 points, a level last seen in April 2003.
The market is being weighed down by a reduced appetite for emerging markets after a jump in interest rates in the developed markets such as the US, which are currently battling high inflation that has forced their central banks to adjust rates upwards.
This flight of capital to the US market — where inflation is at a 40-year high of 8.6 percent — has triggered steep price falls of blue-chip firms such as Safaricom, Equity Group and East Africa Breweries Limited (EABL) that are a favourite of foreign investors.
These stocks dominate the foreign trading desk and are now trading at one to two-year lows despite their key business indicators remaining strong, particularly profitability.
“Company fundamentals are not the issue at the moment. The main reason behind the market slump is the Western rate hikes, which are affecting emerging markets,” said Melodie Ndanu, an analyst at Genghis Capital.
“The dollar has also appreciated against global currencies, which combined with the overhang from the upcoming election, has reduced the inflows into the local capital market.”
The benchmark US 10-year bond rate — a closely watched gauge of market inflation expectations over the next decade — has climbed to 3.48 percent, its highest since April 2011.
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.
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.
Similar price pressures have hit the Kenyan economy, where prices of essential food items such as flour and cooking oil have risen sharply, pushing inflation to a 28-month high of 7.1 percent.
The price of fuel, which has a knock-on effect on the cost of other goods in the economy is also at an all-time high, retailing at Sh159.12 per litre of petrol and Sh140 for diesel in Nairobi.
A higher cost of living eventually hurts the stock market and other investment classes, since it cuts the disposable income that individuals can direct towards investing activities.
They are also likely to adopt a more cautious stance and keep more cash at hand to cater for further unforeseen shocks.
The NSE’s imbalance in terms of wealth distribution among stocks has also weighed against the market’s performance.
Wealth at the bourse is concentrated in the four largest firms—Safaricom, Equity Group, KCB and EABL— where they account for 72 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.
Safaricom’s share has shed a third of its value this year, dropping from Sh37.95 at the beginning of January to Sh25.70 yesterday, which has translated into a market cap erosion ofSh490 billion.
Equity, which has fallen by 22 percent to Sh40.95, has shed Sh44.5 billion in investor wealth, while EABL and KCB have shed Sh28.7 billion and Sh21.9 billion respectively after seeing their share prices fall by 22 percent and 15 percent this year.
The four counters’ dominance in the market extends to trading activity, partly because foreign investors almost exclusively trade on these large stocks due to their ample liquidity that can support large trades.
Foreign investors, who account for about 55 percent 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 Sh4.2 billion from the market last month, taking their cumulative net sales this year to Sh7.6 billion.