A Bloomberg report on October 2 has elicited a response from the Nairobi Securities Exchange. The report classified the Kenyan stock market as the world’s worst-performing stock market.
The conclusion was based on the performance of the Nairobi All Share Index (NASI). The index has seen a significant drop in value from the beginning of the year. The year-to-date performance indicates a 24.1% depreciation, from 125.91 posted in January to 95.54 as of October 4.
These facts indicate the Bloomberg report’s perspective. However, the NSE said in its response that many factors determine a stock market’s performance. This article will review why the All-Share Index does not always show the full picture.
First, the All-Share Index has a limited scope of inclusion. It typically includes selected stocks from various sectors within an exchange. However, the number of included stocks can be limited, often representing only a portion of the market. This selective approach can exclude smaller or less liquid stocks, potentially skewing the index’s performance.
For instance, Safaricom’s weight in the NASI’s All Share Index means that company’s performance has a massive effect on the index. So the All-Share Index takes a great hit if the company struggles.
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This concentration of weights also exerts disproportionate influence on the index’s movements. While their performance matters, it can overshadow the struggles or successes of smaller, less prominent companies. So the good performances of smaller companies do not necessarily reflect on the All Share Index.
The All-Share Index also lacks fundamental analysis. The index is a quantitative measure that does not consider the fundamental health of the companies it includes. Even companies with deteriorating financials may continue to influence the index if they maintain high market capitalization.
These are points that should not be ignored when analyzing the All-Share Index’s performance. This is not to say the market performed well, as many other indications and metrics point to poor performance of Kenya’s equity market. The market reflects the struggling economy. Robustly developing new products and ways to raise capital and funding for businesses using the capital market will certainly positively affect the market’s performance.
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