The Effect of Macro Economic Variables on Stock Market Returns at the Nairobi Securities Exchange

Abstract

Purpose – This paper sought to establish the effect of Macro Economic Variables on the Stock Return at the Nairobi Securities Exchange.

Methodology – The study employed a regression and correlation analysis. Monthly secondary data for the period July 2011 to June 2016 was collected from the Central Bank of Kenya (CBK) and Nairobi Securities Exchange (NSE). Data was analyzed using regression and descriptive statistics.

Findings - The study established that there was a weak positive effect of 15.7% of the macroeconomic variables that were selected for the study on the stock returns at the NSE. The study further established the exchange rate (US$/Kes) had a major effect on the stock return for the period of study while money supply (M2) and the CBK lending rate had an insignificant effect on the stock return. Money supply was found to have a positive effect on the exchange rate whereas the CBK lending rate was negatively influenced by the money supply and the exchange rate.

Implications –All the stakeholders at the Nairobi Securities Exchange should be aware of the macroeconomic variables as they have an effect on the stock return. The exchange rate also ought to be monitored keenly as it had a higher positive effect on the stock return. The Capital Markets Authority of Kenya and the Nairobi Securities Exchange should ensure there are adequate policies related to share pricing as well as enhancing its regulation on the share trading at the Nairobi Stock Exchange. The Government has to continue ensuring that it gives report on the macroeconomic variable status in country as this affects the investor returns that impacts the economy as a whole.

Value - The study recommends that the CBK lending rate could be used to lower simultaneously the amount of money supply in the economy and the rate of foreign currency exchange to the Kenya Shilling. The study also recommends that CBK should continue ensuring that it improves on measures that control the money supply, the exchange rate and CBK lending rate as they affect earnings at the stock market.