Economic Performance Indicators and Stock Returns at the Nairobi Securities Exchange

Abstract

The study is an assessment of the economic performance indicators and stock returns at the Nairobi Securities Exchange. Stock market activities play a major role in determining the level of economic activities in both emerging and developed economies, by providing and efficiently allocating capital for investment, providing appropriate platform to engender best corporate practices that will result in growing investment and further growth of the economy. The study adopted an explanatory research design. The population of this research consists of all the 62 listed companies in the Nairobi Securities Exchange. A census methodology was employed since all the listed firms were studied for a period of five years (2008 to 2012). The main source of data was the NSE Handbooks. The study used Statistical Package for Social Sciences (SPSS) to generate the descriptive statistics and also to generate inferential results. Regression analysis was used to demonstrate the relationship between the macroeconomic factors and stock returns in the NSE. Results show that there is a positive relationship between stock returns and underlying inflation, overall inflation, economic growth, interest lending rate. Results also revealed that there is a negative relationship between stock returns and exchange rate. However, the only statistically significant variables in the study were exchange rate and economic growth. Sectoral analysis results further showed that different sectors stock returns are mainly influenced by three economic indicators namely economic growth, exchange rates and overall inflation. From sectoral analysis, it was concluded that economic growth and exchange rates are main determinants of stock returns. It is recommended that investors should take into account economic growth when predicting stock returns. This is because periods of high economic growth lead to an increase in stock returns. In addition, it is recommended that investors should factor in the exchange rates when making investments (making stock return predictions). This is because an increase in exchange rates leads to a decrease in stock returns.