The Nairobi Securities Exchange (NSE) is poised for positive developments following the recent announcement from the US Federal Reserve regarding its intention to implement three interest rate cuts in 2024. This comes as a welcomed relief for NSE stakeholders who have grappled with capital flight triggered by elevated rates in the United States.
Notably, the impending interest rate reductions in the US are expected to trigger a shift in global currency dynamics, with the shilling and other currencies potentially experiencing gains against the dollar. As US assets become less appealing, the dollar’s value is projected to recede.
The Federal Reserve had incrementally raised its interest rate from near zero in March 2022 to the current target range of 5.25-5.5 percent (5.3 percent average) in response to a surge in US inflation, which reached a 40-year high in the latter half of 2022. In its recent meeting, the Fed maintained the rate for the third consecutive time and outlined projections for three cuts in the coming year, with market analysts anticipating reductions of up to 1.5 percentage points.
The substantial increase in US returns during this period led to an exodus of funds from emerging and frontier markets, including Kenya, contributing to a strengthening dollar globally. As US rates are anticipated to decline, a reversal of these capital outflows is expected, potentially increasing the appeal of smaller market assets for investors.
Over the last two years, the NSE has suffered from foreign investor departures, resulting in cumulative net outflows of Sh44.5 billion between January 2022 and November 2023. This has predominantly impacted large blue-chip stocks favored by foreign investors, constituting a significant portion of the market’s wealth and index weight.
Since the commencement of 2022, the NSE has witnessed a reduction in investor wealth or market capitalization by Sh1.14 trillion, standing at Sh1.45 trillion currently. Concurrently, the NSE 20 Share Index has retreated by 21 percent to 1501.16 points, and the NSE All Share Index has experienced a 44 percent decline to 93.05 points.
A reversal of foreign portfolio outflows and the subsequent decrease in dollar demand will be advantageous for the shilling, which has depreciated by 19.5 percent against the dollar this year. The Central Bank of Kenya (CBK), in its monetary policy committee meeting on December 5, increased its base rate by 200 basis points to 12.5 percent to counteract these outflows, aiming to enhance the competitiveness of local assets and attract dollar inflows.
The combination of the CBK’s decision and the anticipated rate cuts by the Fed is poised to diminish the premium that US assets have enjoyed over Kenyan ones, potentially revitalizing the NSE and stabilizing the local currency.
