America’s Rate Hike Threat pushes NSE to 6-year Low

On Monday, investor wealth at the Nairobi Securities Exchange (NSE) fell to a six-year low as signs of a rate hike in the United States prompted foreign investors to sell off blue chip stocks such as Safaricom, East Africa Breweries Limited (EABL), and banks.

Market capitalisation (the value of stocks on the Nairobi stock exchange) fell to Sh1.79 trillion, the lowest level since March 2017.

The NSE has lost Sh135 billion since last Wednesday, with Safaricom, EABL, Equity, and KCB Group accounting for 98 percent of the loss, just a day after the US Federal Reserve indicated that the size of its interest rate hikes could be increased at its next meeting on March 21-22.

This reflects a significant shift in the economic outlook since the Fed’s most recent policy meeting in early February, raising the prospect of a half-point increase in the US banking regulator’s benchmark rate.

Smaller markets, such as the NSE, have suffered as a result of the increases because investors, particularly foreigners, are drawn to western bonds and equities, which are viewed as safe havens in times of global uncertainty.

The US central bank has raised its key rate, which affects many consumer and business loans, eight times in the last year.

The NSE sell-off has defied a Sh23.4 billion Safaricom interim dividend, which was announced on February 28 and expires on Wednesday, as well as bankers’ promises of outsized shareholder pay-outs in the coming days.

“Last week, when the chair of the Fed made the comments, this triggered foreign investors towards selling. Since Safaricom is the most foreign-traded counter in our market it has suffered the most followed by Equity Group because of what foreign investors are seeing in terms of the dollar [supply] and the fact that the US rates are expected to go up further,” said Lisa Kimathi, an analyst at Standard Investment Bank (SIB).

“It has nothing to do with the fundamentals of the counters themselves, but is about the heightened global macroeconomic risk.”

Fed Chair Jerome Powell told a US Senate panel on September 7 that if evidence of a robust economy and persistently high inflation continues, the Fed will increase the size of its interest rate hikes.

Safaricom accounted for the majority of the NSE losses, accounting for Sh118 billion, highlighting its position as the most exposed stock to foreign investor trading on the bourse.

The other members of the top five stocks on the bourse, Equity Group, EABL, KCB, and Co-operative Bank, have lost Sh5.6 billion, Sh5.9 billion, Sh3 billion, and Sh1.5 billion, respectively, since March 8.

Since last Wednesday, Safaricom’s share price has fallen to Sh19.60, its lowest since May 2017, from Sh22.55, while Equity Group’s share price has fallen by Sh1.50 to Sh42.90.

Due to their high levels of liquidity and solid fundamentals, the two stocks are the most common among overseas traders.

Since last Wednesday, the top five counters have effectively responsible for 98 percent of the bourse’s wealth losses, underscoring their excessive power over the market’s fortunes.

The remaining 59 listed equities have combined for barely Sh848 million in investor wealth losses over the period, showing that the most recent decline is solely attributable to foreigners selling after comments made by the US regulator.

The US market, which has been offering investors higher rates on bonds with the extra benefit of safety against the economic turmoil that has gripped the global economy, has been drawing investors over the past year, and emerging and frontier equities markets have found it difficult to compete.

As a result, dependable equities like Safaricom, which had survived the Covid-19 economic difficulties, have taken a significant damage.

The market has largely deviated from the pattern of increasing dividends expected from banks and other blue-chip companies following record profits in the 2022 fiscal year due to the global challenges.

Foreign investors are also concerned about how difficult it is for them to bring home their sale proceeds and dividend payments from abroad due to the Kenyan currency market’s increasing access restrictions to dollars.

After a spike in net earnings to a record Sh9.06 billion last year from Sh7.21 billion posted in 2021, Stanbic Bank announced a 40 percent increase in its distribution to Sh12.60 per share last week, paving the way for bigger pay-outs.

While BAT Kenya’s books are still open for a final payment of Sh52 per share, Safaricom and EABL are also disbursing interim dividends of Sh0.58 and Sh3.75 per share, respectively.

Their selling behavior immediately following the Fed’s announcement of higher rates is also a sign of their concerns about the availability of dollars, as they don’t want to be left out in the cold should they decide to move abroad in the future to benefit from what could be higher US interest rates.