The Effect of Macroeconomic Variables and Global Oil Prices on Stock Performance of Listed Firms in Kenya

Abstract

Kenya has one of the most vibrant stock markets in the region that has attracted a considerable amount of foreign as well as local investment capital. The correlation between investment and local macroeconomic factors including global factors of production like commodity prices such as oil is of interest for both policy makers and investors. The basis of this research was to establish the relationship between this nexus and observe this relationship for purposes of hedging against macroeconomic and global risk. Quarterly secondary data for the period of January 2008 to September 2016, consisting of 35 observations was collected from Nairobi Securities Exchange, the Kenya National Bureau of Statistics and Central Bank of Kenya. Descriptive research design was adopted for this study whose objective was to investigate the effect of macroeconomic variables and global oil prices on the stock performance of all listed firms in Kenya. Initially, the macroeconomic variables considered were GDP, Money Supply (M2), 90 day T-bill rate, exchange rate and inflation. However, there was a strong correlation between some independent variables which were M2 and GDP as well as M2 and exchange rate. In order to address the issue of multicollinearity, two independent variables M2 and GDP were dropped. Analysis of Variance was used to test the significance of the model. The critical value was F (4, 30) = 2.69.The computed F value of the research was 5.368.Considering that 5.368 > 2.69 hence there was a significant relationship between the assessed variables. The findings of the study revealed a positive correlation between the NSE All Share Index (NASI) and exchange rate and T-bill rate. A negative correlation was observed between NASI and Inflation rates as well as global oil prices. These findings were consistent with those of similar studies. The study therefore lends support to the importance of these variables in stock market performance and recommendation to policy makers and financial sector regulators is to formulate policies which will help in the growth of capital markets especially the stock market to helps us achieve our vision of transforming the country’s economy into middle-