CEOs of listed firms have a key role in returning investors to Nairobi bourse

Warren Buffet famously said “a stock market is designed to transfer money from the impatient to the patient.”

The Nairobi Securities Exchange (NSE) has been on a lull in the past three years and this scenario is not unique to NSE as many exchanges across the globe have witnessed downturns and are slowly correcting. Is this downturn due to economic recession and inflation?

Central banks across the globe have issued careful statements, saying that inflation is going to be temporary. Naturally, this is the right move as they are calming fears.

If consumers fear a long-term higher rate of inflation, it can quickly become a self-fulfilling prophecy. When individuals quickly spend to avoid higher prices in the future, we are in what is called the price spiral, and essentially this risks runaway inflation. Traditionally, the central banks have controlled inflation by raising interest rates, which makes borrowing more expensive.

Historically inflation has been bad news for company stocks. There is empirical evidence, suggesting that when it comes to periods of higher inflation markets and investments face a level of the downturn. 

Historical trends are never a guarantee of future performance, but researchers have found that across all sectors, energy stocks delivered the best positive annual returns.

Produce gas

Companies that produce gas, oil, or renewable energy were historically thriving during inflation. This was not particularly true during the Covid pandemic impacted demand for energy. It can be noticed that inflation is caused by increasing energy prices.

When the spread of Covid-19 led to global lockdowns, markets plummeted. There was panic with investors literally offloading all sorts of what they considered to be risky assets, including stocks. This shock hit the markets despite the fact that the securities exchange of any country is an indicator of the health of the economy.

Once Covid-19 was formally declared a pandemic by WHO in early 2020, global money markets were impacted and securities exchanges started to witness downturns. Lockdowns meant that people were spending less than before the pandemic and this impacts corporate earnings and the economy.

Additionally, incomes were impacted due to sudden job cuts. While the US supported income by providing fiscal stimulus to charge consumer spending and Britain issued furlough compensation to temporarily discharge workforces, the same was not the case for the rest of the world.

During Covid, central banks lowered interest rates, so the cost of borrowing became low and quantitative easing effectively pumped money into the economy.

During times of low interest, leaving money in a savings account may not have been meaningful. Hence the money found its way into other more lucrative investment options.

The pandemic limited the supply of goods and that has led to a rapid increase in inflation. Product categories like cars, and electronic appliances have seen a rapid acceleration in prices and inflation.

We have not seen oil supply and prices return to pre-Covid levels; this is also due to the prolonged Russia-Ukraine conflict.

When inflation hits, there is an expectation of an interest rate hike from central banks, so in theory, when inflation hits, banks should benefit because the interest rate hike makes it more profitable for banks to lend money.

As investors become more concerned about the economy, and the effect that higher inflation could have on it, they could turn away from perhaps some of the more aggressive and volatile stocks such as tech stocks and look for more traditional blue chips.

The management of listed companies also has a role to play in maintaining investor confidence in the company and market. Managers must first differentiate between temporary and fundamental problems affecting their stock price.

More than half of the stock prices of listed companies at the NSE have yet to return to the Pre-Covid-19 levels.

NSE-listed companies

It is hoped that most NSE-listed companies will be back on track with the dividend payouts, especially those companies whose shares pre-Covid used to be in high demand.

Foreign investors account for a majority of the investments via the NSE whose data shows that foreign sales increased significantly during the first six months of year 2022, pushing the benchmark NSE-20 Share Index below the 1,700 mark for the first time in 20 years.

How long will the NSE remain in a lull and what steps are being taken to revive the securities exchange? The companies are back to performing well, so what is going wrong?

Management of listed companies must improve communication with investors, refocus corporate strategy, signal confidence to stabilise price, retain talent, acquire new talent and focus on performance and issue dividends to attract investors.

Currently, given the lucrative central bank returns on treasury bills and bonds, many investors in Kenya have invested in fixed return. What steps are the securities exchange and management taking to ensure that their shares are in demand? Clearly, this is the time to release reserves to pay dividends.

It would be ideal to reduce tax pressures on international investors to attract foreign direct investment in local money markets and securities exchange.

Barot is a business and financial analyst [email protected]