The Influence Of Macro Economic Factors On The Stock Market Performance In Kenya

Abstract

The study sought to analyze the influence of macroeconomic factors on stock market performance in Kenya. The macroeconomic factors of interest in this study include interest rates, money supply, economic growth and net capital flow. The study was anchored on the Flow oriented theory, the monetarist model and the efficient market hypothesis. The study targets all the firms listed in the Nairobi Securities Exchange (NSE). The study used secondary data which was sourced from the Central Bank of Kenya (CBK) and Kenya National Bureau of Statistics (KNBS). Data was analyzed using STATA using time series methods. The characteristics of the data were determined using exploratory time series analysis. Trend analysis was also done on all the variables in order to ascertain the behavior across the time period. This was achieved through line plots. The appropriate time series model for the data was Autoregressive-Distributed Lag (ARDL). This was used to determine the relationship between macroeconomic variables and NSE performance. Post estimation tests were done to determine how the model used is effective in explaining the relationship between variables in the study. This was achieved using the Granger Causality test. Based on the study findings, the study concludes that the macroeconomic environment in the country over the study period have been changing greatly. There were huge variations in the interest rates, exchange rates, and BOP. Based on the granger causality test, the study concludes that interest rates granger cause NSE performance, hence, the interest changes can be used to forecast changes in the NSE performance. Changes in the interest rates is therefore a key factor used by investors in making investment decisions when buying stocks in the NSE. The granger causality test also found out that exchange rates granger causes the NSE performance. This implies that investors in the stock market can base their decision on the exchange rates. From ARDL model, there was a statistically significant relationship between exchange rates and NSE performance. Specifically, the study concludes that exchange rates significantly influence the NSE performance in that an increase in exchange rates leads to a decline in the NSE performance. This means that an increase in the exchange rates reduces foreign participation in the NSE. This is likely to lower the returns and hence a low NSE index. A stable currency is thus crucial as it helps to maintain market vibrancy as trading continues. When market volatility is high, the risks are high since it is hard for investors to approximate precisely the future direction of their investments. This discourages investment and hence low NSE index. Regarding the influence of net cash flow on the NSE performance, the study concludes that changes in the BOP influence the stock market performance. This implies that, when making decisions on whether to invest in the NSE, investors consider the net capital flow. The findings imply that an increase in the BOP causes the stock market returns to increase which indicates the listed companies get the capability to expand productions and increase sales. This leads to increased sectors earnings for firms which results in better dividend payments for firms leading to an increase in the stock market shares. Generally, the study concludes that interest rates, exchange rates, and BOP influence the NSE performance and can be used to predict the NSE performance. There was a strong and significant relationship between all the macroeconomic factors and the NSE performance. This implies that the macroeconomic environment in Kenya is a key determinant of business activities including the performance of equity markets.