Equities

The NASI (Nairobi all-share Index), NSE 25 and NSE 20, which are indices that track the performance of listed stocks at the Nairobi Securities Exchange (NSE), recorded mixed performance in October 2022. The NASI and NSE 25 indices increased by 0.02% and 0.63% respectively, while the NSE 20 declined by 2.19% as at 28th October 2022. This showed slight improvement from September 2022 when the three indices declined by 6.58%, 4.67% and 1.91%.

2022 has witnessed major challenges in the global economy, stemming primarily from geo-political tensions which have accelerated inflation as a result of high commodity prices, especially energy. As a result, central banks across the world, premised by those of developed economies such as the US Federal Reserve Bank have been raising their central bank rates in order to counter the high inflation.

Raising rates by these central banks has however had negative feedback effect on global financial markets including Kenya. Due to attractive rising rates in the developed economies, investors are redirecting their capital towards securities in these economies since they carry a lower level of risk as compared to emerging economies. The Capital Markets Authority Q3 '2022 Quarterly Statistical Bulletin shows that foreign investor activity hit the lowest level in the last 12 months in September 2022 at 35.92%. This is dismal compared to the average foreign investors activity of 64.66% recorded in the last 12 months. Foreign investor outflows in October 2022 totaled KES 2,808.43M compared to KES 2,033M in September 2022. On a quarter by quarter basis, the second and third quarters of the year saw foreign investor outflows of KES 10,895M and KES 6,965M respectively.

Due to low activity, most stock prices have declined. This translates to declining indices performance through 2022. On a year-to-date basis, as at 28th October 2022, the NASI, NSE-25 and NSE-20 have declined by 23%, 17% and 12% respectively.

Turnover has consequently been decreasing in 2022 compared to 2021. Monthly total equity turnover declined by 48.28% month-on-month in October 2022 from KES. 10.20 billion to KES. 5.27 billion as at 28th October 2022.

This led to a general decline of listed stock prices at the NSE.

We maintain the view that this presents opportunities for investors to buy listed counters at low prices. A look at some randomly sampled companies, based on 2022 half year results and year- to- date price changes, shows that prices have been declining whereas earnings are growing. Declining prices in equity markets present investors with the opportunity to invest in companies with growing earnings. This is because whereas capital outflows negatively affect the market performance, it does
not hamper the ability of companies to grow their earnings and report positive performance.

Fixed Income

In a similar fashion, increasing interest rates in the global markets and local high inflation have affected the bond market in Kenya.

The government raises capital to finance its operations and infrastructure projects through borrowing using financial instruments called bonds. By issuing bonds it promises to repay the investor a fixed rate of return called a coupon rate over the duration of the bond.

As investors redirect their capital to the developed markets, the Central Bank of Kenya (CBK) has had to raise interest rates to try and retain investor capital in the Kenyan economy. The Central Bank Rate was raised from 7.5% to 8.25% in September 2022 by CBK. This action led investors to expect that the rates at which the government borrows money from investors will rise as well. Therefore, investors expected that the rates that they would receive for lending to the government through buying bonds would be higher and therefore they requested for higher coupon rates for most bond issues.

Unexpectedly, the CBK has been unwilling to accept aggressive bids from investors. This has led to CBK failing to raise the capital it requires through the 2022 bond offerings relative to 2021. This is referred to as an ‘under-subscription’.

As shown by the tables below, in the months to October 2021 the CBK offered bonds totaling to KES 588B and raised KES 689.9B. This was an over-subscription. However, in the same period in 2022 CBK offered bonds worth KES 611.5B but only raised KES 488.35B.

There is a mismatch between the investors' expected returns and CBK’s reluctance to accept higher rates from the investor bids. Investors have therefore opted to invest in short-term investments such as treasury bills (T-Bills) as they carry a lower-level risk while they assess the current situation. T-bills are issued by CBK in three categories of day periods: 91 days, 182 days and 364 days. As shown by the table below, there has been over-subscription, specifically within the 91-day T-bill in the month of October 2022.

We contend that CBK, in its quest to raise funds, is currently between a rock and a hard place as it may have no option but to accept higher offers from investors in upcoming bond issues.

We encourage investors to take advantage of the potential high interest rates in the upcoming bond issues which will provide them with an opportunity to lock in preferential coupon rates.

Investments into the existing bonds at such a time may also prove advantageous since bond prices decline when bond interest rates rise.

FA Jesse Ludenyo| Research Analyst
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