Analysts rank Kenya’s stock market poorly

Kenya is the worst performing stock market in Africa, according to analysts.

The latest update from the African Alliance Kenya Securities says that year-to-date the local stock market performance went down by 21.9 per cent in US dollar terms compared to North African countries, which faced uprisings earlier in the year.
Their report comes as the cost of living continues to increase under a fast depreciating shilling.

“We believe equities in Kenya will continue to under-perform generally for the rest of the year especially for foreign investors who will take a hit on the exchange rate,” said Mr Eric Musau, an analyst at African Alliance Kenya Securities. “We do not expect the currency to strengthen in the short-term.”

As at Friday, June 24, 2011, on week-on-week, turnover declined to Sh1.15 billion from Sh1.94 billion. NSE 20 Share Index was down by 0.40 per cent during the week to stand at 3969.03 points.

Mr Musau said that while the Kenya shilling has retraced some of the losses it experienced, it is still the worst performing currency in Africa year-to-date. It is 12.1 per cent weaker against the US dollar, 14.0 per cent lower to the Japanese yen, 21.4 per cent off to the euro and 9.7 per cent against the South African rand.

With the rising inflation and unstable Kenya shilling, analysts say essential imports will become more expensive. At an average inflation of 12.95 per cent last month, up from 12.05 in April, low income earners are hit the most. 
During the month, said the African Alliance analysts, low income earners experienced an inflation rate of 13.97 per cent, the middle income bracket had 8.74 per cent while high income earners had an inflation of 6.18 per cent. Other provinces, except Nairobi, had an inflation rate of 13.31 per cent.

“Inflation appears skewed towards the most vulnerable in society. The discretionary spending of the high income earners remained relatively insulated while low income earners have been most affected,” said Mr Musau.

He warned that the Central Bank of Kenya’s monetary tightening in a bid to tame rising inflation and the weakening currency may slow economic growth, which could affect the banking sector through lower borrowing.

“If this slows substantially, we could see interest income as well as non-funded income affected leaving little room for banks apart from cutting costs. The banks are already resetting their lending rates upwards in anticipation,” he said.

Commercial Bank of Africa (CBA) and I&M Bank will be adjusting their base lending rates next month.

CBA said recently that it would be raising the rate of its loans denominated in Kenya shillings from 13 per cent to 14.5 per cent from July 11 while I&M Bank would push up its lending rates from 13.5 per cent to 15 per cent effective July 1.

“Volatility in the currency will also see very strong growth in foreign currency income,” said Mr Musau.

“We see inflation worsening before getting better, easing towards the end of the year when harvests start.”

Ms Razia Khan, Standard Chartered Bank’s head of Africa research, said in a briefing last week that inflation may rise to slightly above 20 per cent later this year if the shilling continued to depreciate and food and fuel prices remained high.

She said food and fuel price increases were largely to blame with the weakness of foreign exchange making matters worse.

Tuesday morning, commercial banks quoted the shilling at 90.00/30 against the dollar, stronger than Monday’s close of 90.70/91.00.

On the good side, however, Mr Musau said exports with substantial domestic content were likely to be more competitive in the global market with non-essential imports expected to reduce and foreign direct investment may start to pick up.