Effect of macro-economic factors on the performance of the equity market of Nairobi securities exchange

Abstract

The study sought to establish the effect of macroeconomic factors on the equity market performance of Nairobi Securities Exchange. The study was guided by an objective; to examine the effect of the selected macro-economic factors on equity market performance in Kenya. The selected macro-economic factors included inflation rate, exchange rate, money supply and real Gross Domestic Product. The study followed descriptive research design and used secondary data. The data spanned the period between 2005 and 2014. The data used for the analysis was the average annual figures and was obtained from; Nairobi Securities Exchange (equity market capitalization), Central Bank of Kenya (Inflation rate), Kenya National Bureau of Statistics (Average yearly GDP growth rate) and International Monitory Fund website (Money Supply M3). The data was analyzed using SPSS version 21. The study used equity market capitalization to measure equity market performance as well as Average annual inflation rate to measure inflation, Average annual exchange rate to measure Exchange rate, Average yearly monetary base (M3) to measure money supply and Average annual GDP growth rate to measure GDP. The study results established that Equity market capitalization (used to measure Equity market performance) as well as average annual inflation rate (used to measure inflation), money supply (used M3), and GDP growth rate deteriorated just before, during and immediately after the general elections. The regression analysis obtained Coefficient of determination (R), Correlation Coefficient (R-Square), P-Value and F-test statistics which were; 0.865, 0.748, 0.091 and 3.715 respectively. Since R was positive (0.865) the relationship between the Equity Market Performance and the macro-economic factors was positive. Since, R-Square was below 0.75 as it was (0.748) the relationship between NSE performances as measured by Equity market capitalization is weak. However, the study results established that the relationship between exchange rate as measured by average annual exchange rate and Equity Market Performance is inverse as the corresponding coefficient in the model was negative. Also, since P-Value (0.0061) was smaller than 0.05, the established model describing the relationship between the study variables is statistically significant. P-Values associated with variables GDP and exchange rate were all smaller than 0.05 depicting that they were individually statistically significant in predicting the Equity market performance whereas money supply and inflation rate were slightly above 0.05 hence statistically insignificant. The study concludes that there is a positive relationship between the selected macro-economic factors (Inflation rate, Exchange rate, money supply, and GDP) and Equity market performance. Further, the study concludes that the relationship between exchange rate and equity market performance is inverse.