How NSE Crisis Can Affect Kenyan Construction Stocks

Recent trends show that investors are moving away from the Kenyan stock market, which could cause disruptions among construction companies this year.

The 2023 Wealth Report by realtor Knight Frank shows that commercial real estate properties made up 40% of the investment portfolios of rich Kenyans in 2022, while stocks only accounted for 18%.

This year, Knight Frank reports that 60% of wealthy Kenyans want to invest in private rental properties as they move away from trading company stocks.

Investors’ focus on the real estate market can benefit construction firms contracted for developments and repairs. However, construction companies that rely significantly on stocks may have to lean on other sources of funding as the Kenyan stock market enters a crisis.

Here’s what you need to know about the current stock market crisis and its effect on Kenyan construction companies:

Stock market crisis in Kenya

Local investors aren’t the only ones to have pulled away from the stock market over the past few years. Quartz states that foreign investment in stocks has nosedived in the last two years. Foreign investors have cashed out about Sh24 billion from the Kenyan stock market to seek safe havens.

Unfortunately, the Nairobi Securities Exchange (NSE), East Africa’s biggest bourse, recorded a 30.1% plunge in foreign investment in March. Experts state that the limited number of local traders are the ones who are currently keeping the country’s stock market afloat.

Foreign investors sold their stocks and cashed out a significant amount of their money due to escalating global risks. Quartz cites that one of the risks that alarmed foreign inventors is the shortage of dollars in the country.

Kenya has struggled with this problem since 2020, and the situation worsened between January and September 2022 when the share values of the firms in the NSE fell by 28%.

Unfortunately, Kenya has also had to face food insecurity and rising inflation rates amid this stock market crisis.

Russia’s invasion of Ukraine also caused a global fuel price hike, which further affected the cost of living and local companies’ stock market performance.

It’s not surprising that local and foreign investors want to seek safe havens after the stock market crisis. These safe havens in stock trading include big tech companies like Apple and Microsoft, as well as global pharmaceutical companies like Merck & Co., and Eli Lilly and Co.  

Investors can trade these stocks in both bull and bear markets because of their low and stable spreads and steady performance in the global stock market.

Aside from trading in international safe havens, Quartz states that investors are also trading in frontier markets like Nigeria, Zimbabwe, and Mauritius.

Interest rates have also increased in these countries, which can be concerning for some traders. However, investors prefer to buy stocks from these countries instead of Kenya because these stocks are gaining better returns.

Unfortunately, the stock market crisis is a huge blow to the companies listed on the NSE. Financial security and expansion prospects may stall due to the current state of the country’s stock market, which may not bode well for Kenyan construction companies that are reliant on stock investments.

Impact of the stock market crisis on construction companies

Companies usually create stock shares to finance their operations and scale their businesses. Due to the current stock market crisis, construction firms listed on the NSE may have to resort to cost-cutting measures and price increases to maintain their operations.

E.A. Portland Cement, one of the construction companies on the stock market, has already increased the prices of its main products. The price for their Blue Triangle cement was Sh605 per bag in January, while they sold the Green Triangle cement at Sh600 per bag.

Cement prices rapidly increased last April because of the high cost of coal, electricity, and diesel, which are necessary for cement production. On top of that, the stock of E.A. Portland Cement has decreased by 24.29% in a year.

Consequently, the company has had to raise prices to make up for the high cost of production materials and the reduced value of company stocks.

Compare this with another construction company listed on the NSE, Bamburi Cement. Business Daily Africa states that the stock value of Bamburi Cement dropped significantly from Sh194 in early 2016 to Sh38 last year. This drop in value is largely due to their high operating costs and strong competition in the industry.

However, there’s a possibility that Bamburi Cement’s stock value may eventually rise due to its net profits and shareholders. The company’s net profit jumped by 22% recently because it supplied materials for the construction of the Nairobi Expressway and received high numbers of orders for cement from homebuilders.

On top of that, billionaire investor Baloobhai Patel also acquired an additional 7.9 million shares in Bamburi Cement. The company’s annual report reveals that Patel’s ownership rose from 7.01 million shares to 14.9 million shares.

Through this big investment, Bamburi Cement has been able to gain significant financial support and focus on further increasing the company’s profitability.

Unlike E.A. Portland Cement, Crown Paints is also doing relatively well in the stock market. The company is the market leader in the Kenyan paint industry and generates an annual turnover of about Sh6.2 billion.

Notably, it is also the only paint company that is listed on the NSE. Despite the current stock market crisis, Crown Paints increased its stock value by 11.17% from 2022.

Unsurprisingly, the company’s stock market value remains high due to an increase in net profits by 21.8% over the past year.

While the stock market crisis is a pertinent issue, companies in the Kenyan construction industry have different performances and, in some cases, may even have the opportunity to improve their stock values.

Nonetheless, most companies in the construction industry may have to prepare to adjust their budgets accordingly in the next few years due to the reduced support from investors amidst the continued rise of inflation rates.

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