NSE tipped for further decline as inflation, rates hike batter economy

Senior Portfolio Manager at ICEA Lion George Kamau (left). [Wilberforce Okwiri, Standard]

The country could be looking at the onset of a prolonged bear market (prolonged price declines) amid rising interest rates, inflation and the spillover effects of the Russia-Ukraine conflict.

Senior Portfolio Manager at ICEA Lion George Kamau said the Monetary Policy Committee (MPC), which meets on July 27, is expected to raise the Central Bank Rate by between 50 and 100 basis points (0.5 to one per cent).

It could be the second consecutive rise in the benchmark rate in two months, after the Central Bank of Kenya’s (CBK) decision-making organ raised the rate by 50 basis points on May 30. The committee had hitherto kept the rate unchanged, with the last change having been in July 2015 when the rate hit 11.5 per cent, the highest at the time.

Investors should consider “appropriate investment strategies” that will help them “ride the trifecta wave safely and still preserve their capital,” according to ICEA Lion Asset Management Chief Executive Einstein Kihanda.

Speaking during the investment management firm’s Investor Pulse third quarter 2022 report, Mr Kamau warned that the world is grappling with a possible global recession.

This coupled with Kenya’s own challenges, including poor rainfall, which has led to reduced production and increased cost of food, could further hurt investors’ options.

“Investors should invest in the NSE (Nairobi Securities Exchange) for the long-term and Treasury bills, short-term bonds and dividend-heavy stocks in the near term,” he said.

Mr Kamau further noted that poll jitters put further pressure on investors to preserve their capital.

But the current inflation of 7.9 per cent, which is above the targeted range of between five and 7.5 per cent - a 58-month high - is mainly imported as a result of the Russia-Ukraine conflict, the China lockdown and the strengthening of the US dollar against other global currencies.

[Peter Theuri]

Upward pressure could drive inflation to highs of 8.5 per cent, ICEA warned. Global investor sentiment could impact local markets to keep stock market returns depressed.

But Mr Kamau noted that although Nairobi All Share Index (NASI) “has traded at all times lows recently, the fundamentals of numerous listed companies remain solid” and the “investment rationale (in such companies) is not questionable.”

Investors with a long-term investment horizon could take advantage of attractive entry points being made available under the prevailing environment, he added.

The pressures on the economy have led to investor risk aversion, currency weakness, wealth erosion, high interest rates and a general slowdown in economic growth.

In the face of economic challenges, ICEA advises that the government should increase bilateral trade, increase trade partners and markets and firm up agricultural reforms for industrialisation.

It should consider further tightening of the monetary policy, expansion of revenue base, fiscal consolidation and better targeting of subsidies.

Mr Kamau said there have been good reactions from global central banks, which could see markets improve towards the end of next year.

Kenya should also increase trade partners to diversify risk, seeing crises in some of its biggest trade partners acutely have reduced options, exposing the country.  

For low-income earners, he advised tightening the belt as harder times persist for the foreseeable future.

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