The Nairobi Securities Exchange (NSE) has experienced a prolonged wealth erosion trend in the fourth quarter of the year, extending losses despite gains in several large stocks since October. Market capitalization at the NSE fell to Sh1.466 trillion as of December 11, down from Sh1.487 trillion at the end of September. While losses in the quarter have reduced compared to the third quarter, the equities market continues to face challenges, influenced by factors such as more attractive fixed-income investments, local currency weakness, and foreign portfolio outflows.
Key Points:
- Market Capitalization Decline: The NSE’s equities market capitalization has further declined to Sh1.466 trillion as of December 11, reflecting continued wealth erosion despite some gains in certain stocks since October.
- Index Movements: The Nairobi All-Share Index dropped to 93.86 points from 95.22 at the end of September. However, the NSE-20 and NSE-25 indexes showed gains, reaching 1516.18 and 2418.52 points, respectively, from 951.35 and 1,508.75 points over the same period, indicating a recovery in large-cap stocks.
- Mixed Performance of Blue Chips: While some large-cap stocks, like Equity, demonstrated price recovery, others, including Safaricom, EABL, Co-op Bank, and Absa, continued on a bearish trend, reflecting the mixed performance of blue-chip companies.
- Factors Influencing Bearish Trend: The persistent bear run in 2023 is attributed to factors such as the attractiveness of fixed-income investments, local currency weakness, and elevated interest rates in advanced economies, leading to foreign portfolio outflows from emerging markets like Kenya.
- Market Fundamentals and Discounting: Despite improved earnings in the banking industry and other positive market fundamentals, the NSE remains sharply discounted, with a low price-to-earnings ratio of 5.3 times compared to a historical average of 12.1 times. The market dividend yield stands at a mean 9.2 percent, higher than the historical average of 4.4 percent.
- CBK Interest Rate Increase: The recent benchmark interest rate increase to 12.5 percent by the Central Bank of Kenya is expected to exert more pressure on Treasury yields, potentially enhancing the appeal of fixed-income investments over equity.
Conclusion: The NSE’s continued wealth erosion in the fourth quarter underscores the challenges facing the equities market, driven by a combination of global economic factors, interest rate dynamics, and foreign portfolio trends. The market’s discounted valuation and ongoing efforts to attract investors amid these headwinds will likely shape its performance in the coming months.
