NSE steady as bond yields dip but equities show mixed signals

The Nairobi Securities Exchange (NSE) concluded the trading week on a cautious note, with the NSE All Share Index exhibiting a sideways trend following three consecutive sessions of modest gains. This period of consolidation reflected broader market hesitation as investors adopted a wait-and-see approach ahead of key economic and corporate developments. Trading activity remained subdued, with volumes barely exceeding 80 million shares—a level that underscores the prevailing uncertainty. The market’s muted performance mirrored a broader hesitation among participants, who appeared to be awaiting clearer signals from both the National Treasury and the ongoing corporate earnings season before committing to more decisive positions.

Bond Market: A Gradual but Steady Rally The bond market emerged as the week’s quiet standout, continuing its gradual rally amid favorable liquidity conditions and institutional demand. According to the latest price lists from AIB-Axys Africa, yields on benchmark ten-year government securities eased by another 15 basis points, extending the month-to-date decline to nearly 50 basis points. This downward trend in yields was largely driven by strong demand at the most recent Treasury auction, where the reopened 2032 bond saw significant oversubscription. The oversubscription not only reflected robust investor appetite but also exerted upward pressure on secondary-market prices, reinforcing the bond rally.

Dealers reported steady foreign buying, particularly from regional pension funds seeking to lock in yields ahead of the next monetary policy meeting by the Central Bank of Kenya (CBK). These funds, which prioritize long-term stability, have been incrementally increasing their exposure to Kenyan government paper as part of a broader strategy to diversify portfolios and secure predictable returns. Despite the positive momentum, the rally has remained orderly, with no single trade exceeding 500 million Kenyan shillings. This cautious approach suggests that large institutional players are still testing market conditions rather than making aggressive bets, likely due to lingering uncertainties around global interest rate trajectories and domestic fiscal policy.

Equities: A Fragmented Performance Equity markets presented a more fragmented picture, with only a handful of blue-chip stocks managing to post consistent gains. Safaricom and KCB Group were the primary drivers of positive sentiment, each climbing between 2% and 3% on light but persistent retail demand. Safaricom’s upward movement came ahead of its annual general meeting (AGM), where investors are eagerly awaiting clarity on the proposed infrastructure-sharing agreement with Telkom Kenya. The deal, if approved, could significantly reduce operational costs and enhance the company’s competitive positioning in Kenya’s telecommunications sector.

KCB Group, meanwhile, benefited from a broker upgrade that highlighted improving asset quality and a stable net-interest margin. The upgrade, issued by a leading regional research firm, cited the bank’s successful navigation of recent economic challenges, including elevated non-performing loans (NPLs) and tighter liquidity conditions. Outside these two counters, however, most stocks traded in narrow ranges, with turnover concentrated in a select group of mid-cap names such as East African Breweries Limited (EABL) and Co-operative Bank. The NSE 20 Share Index, which tracks the largest and most liquid stocks, ended the week virtually unchanged, masking the underlying volatility in smaller and less liquid names.

Sectoral Trends: Mixed Signals Across the Board Sectoral performance was equally mixed, reflecting divergent macroeconomic and industry-specific factors. Financials led the modest gains, buoyed by the bond market’s rally, which indirectly supported bank balance sheets. Lower yields reduce the cost of funding for financial institutions, thereby improving net-interest margins—a tailwind that is expected to persist as long as the Treasury maintains its current rate trajectory. This dynamic has provided a cushion for banks, particularly those with strong retail and corporate lending franchises.

In contrast, consumer staples underperformed, with EABL and British American Tobacco (BAT) both registering declines following weaker-than-expected quarterly volume reports. The softness in consumer demand reflects ongoing pressures on household budgets, stemming from last year’s drought, which disrupted agricultural output, and persistently high fuel prices. These factors have constrained disposable income, leading to reduced spending on non-essential goods. Energy stocks were the week’s weakest segment, with KenGen and Kengen shedding 4% to 5% on concerns that the government’s push for cheaper renewable energy could erode margins on thermal power generation. The shift toward renewables, while aligned with Kenya’s long-term sustainability goals, poses near-term challenges for traditional energy producers reliant on fossil fuel-based generation.

Key Risks: External and Domestic Pressures Several risks continue to weigh on market sentiment, both externally and domestically. On the global front, oil prices have crept back above $85 per barrel, posing a threat to Kenya’s import bill and the shilling’s stability. Kenya, as a net importer of petroleum products, remains vulnerable to fluctuations in global oil markets, which could exacerbate inflationary pressures and strain foreign exchange reserves. The shilling, which has faced depreciation pressures in recent months, could come under further strain if oil prices remain elevated, complicating the CBK’s efforts to maintain price stability.

Domestically, the Treasury’s domestic borrowing target for the current fiscal year is already 30% met, leaving limited room for slippage if tax collections underperform. The government’s reliance on domestic borrowing to finance its budget deficit has raised concerns about crowding out private sector credit, which could dampen economic growth. Additionally, early guidance from several listed firms suggests that top-line growth is slowing, even as costs—particularly labor and energy expenses—remain sticky. This mismatch between revenue and expenses could lead to disappointing corporate earnings, further dampening investor sentiment.

Regulatory developments also pose a risk, particularly the Capital Markets Authority’s (CMA) new rules on related-party transactions. These rules, aimed at enhancing transparency and corporate governance, are still being digested by market participants. Some investors have adopted a wait-and-see approach, holding back on new positions until they observe how the first few enforcement cases unfold. The uncertainty surrounding the implementation of these rules has contributed to the market’s cautious tone.

Outlook: Awaiting Key Catalysts Looking ahead, the next major catalyst for the market will be the June inflation print, due later this month. A reading below 5% could reinforce the bond rally and provide the CBK with the cover needed to hold interest rates steady, which would be a modest positive for equities. Conversely, a higher-than-expected inflation figure could prompt a more hawkish stance from the central bank, potentially tightening financial conditions and weighing on market sentiment.

Corporate earnings will also play a pivotal role in shaping market direction. Safaricom’s full-year results, expected in late June, will set the tone for the broader market, particularly given the company’s outsized influence on the NSE. Other major corporates, including banks and consumer goods firms, are also slated to release their financial reports in the coming weeks. These results will provide critical insights into the health of Kenya’s corporate sector, particularly in light of the economic challenges posed by inflation, currency depreciation, and shifting consumer behavior.

Until these catalysts materialize, the NSE is likely to remain range-bound, with selective buying in financials and defensive stocks offset by profit-taking in cyclical sectors. Investors are expected to maintain a cautious stance, focusing on high-quality names with strong fundamentals and resilient business models. The bond market, meanwhile, may continue to attract interest from yield-seeking institutional investors, particularly if the CBK signals a prolonged pause in its monetary policy tightening cycle.

Informational only, not investment advice.