Global political changes are affecting the markets

There has been a re-emergence of political noise that has brought to the fore protectionism rhetoric, exemplified by the UK’s referendum on EU membership and the presidential election victory of Donald Trump in the US. The twin events foregrounded a nascent populism that may gain further momentum in the forthcoming elections in Europe.

There several European elections taking place in 2017. The substantial numbers of refugees that have arrived in Europe will be a major litmus test for nations such as France and Germany. There is also a growing likelihood that the elections in Finland may catapult an anti-EU party into power, encouraged by the Italian referendum vote that led to resignation of Prime Minister Matteo Renzi in 2016.

The UK set the ball rolling by its triggering of Article 50 at the end of March 2017, opening the way for it to formally begin the two-year-long exit process from the EU. What will be critical for the UK will be the future trade deal it secures with the EU, its largest trading partner, considering the hard-line stance being maintained by the other 27 members of the bloc. The UK is still entrenched in uncertainty regarding its future, with fears that a “hard” Brexit will have an adverse effect the pound. These two factors – heightened European political risk and uncertainty surrounding Brexit – will influence the performance of the financial markets in 2017.

Us Interest Rate Hikes

The US Federal Reserve is expected to dial up interest rates in 2017, with two rate elevations expected during the year. The run up to the rate increase in December 2016, coupled with speculation surrounding the incoming US administration’s fiscal measures led to reallocation into the US equities segment over the US bonds segment. We anticipate that the upward momentum in US equities will extend in 2017, uplifted by the aforementioned factors, with foreign participation gradually tilting away from Kenyan equities.

Nigeria Economic Upturn

On the sub-Saharan front, Nigeria, the region’s largest economy, stands to benefit substantially from the expected global oil price uptick. In 2016 the nation unpegged its currency, which was impacted by the slowdown in oil prices, from the fixed-rate regime to a managed float exchange rate, with an aim of luring foreign inflows. The IMF estimates that the nation will record 0.8% in 2017; a reversal of the current recessionary growth. The rise in global oil prices coupled with the removal of capital controls as a result of the exchange rate switch may offer tailwinds for a positive momentum in Nigeria’s equities segment.

Kenyan Equities Market

The Nairobi Securities Exchange (NSE) has been bearish since the beginning of 2015. This has been the longest-lasting bear market in the recent history of the bourse. Data from January 13, 2017, indicates that the benchmark NSE 20 share index fell below the psychological level of 3000, settling at 2971.10 points. All the other NSE indicators closed on a bearish note on this date.

We expect this sentiment to continue in the short term, as a result of the upcoming elections, the strengthening of the US dollar caused by the Federal Reserve’s rate hike and the new US President’s promised fiscal policies that could result in more attractive investment opportunities in the US. For long-term investors, this is the most opportune time to accumulate historically stable, profitable and well-managed but currently undervalued companies at their discounted prices.

Current developments in the NSE include the laying down of a legal framework for the establishment of short selling by Kenya’s Capital Markets Authority. With this in place, investors will be able to take advantage of market movements, regardless of whether the stock market is bullish or bearish. We expect that this will help prop up market trading activity and help in the price discovery process.