Despite the prevailing downturn in equities, stocks with valuations below Sh4 billion on the Nairobi Securities Exchange (NSE) have emerged as the leaders in generating returns for investors in 2023. Out of the 24 firms that have seen their stock values rise since the beginning of the year, 15 are smaller companies, with notable mentions including Kapchorua, Kenya Orchards, Eveready, HF Group, and Flame Tree. This contrasts with the performance of the top five large-cap stocks, including Safaricom, Equity, Co-operative Bank, KCB, and East African Breweries, which have seen their values decline since January.

Among the 15 stocks that have gained by more than 10 percent since January, only Umeme, BK Group, and CIC have market valuations above Sh4 billion. This data highlights that smaller stocks have been more successful at building wealth for investors compared to their larger counterparts.

Analysts point to the large stocks’ exposure to foreign investors, which has been a significant factor in their underperformance. The Kenyan shilling has weakened by 21.2 percent against the dollar since January, and interest rates in developed markets have been on the rise. As a result, the NSE has seen a year-to-date loss of Sh499.3 billion, with Safaricom alone shedding Sh366.6 billion, representing a nearly 40 percent decline. The combined loss for the top five large-cap stocks, including Equity, Co-operative Bank of Kenya, KCB, and East African Breweries, amounts to Sh129.23 billion.

KCB Investment Bank indicates that, in the current environment, real returns for investors, adjusted for currency depreciation and inflation, have become hard to achieve, leaving investors with limited investment options. According to their weekly research report, the few attractive counters are found in sectors like agriculture and manufacturing.

Companies in the agricultural sector have proven to be resilient, given their ability to pass through inflationary costs to consumers and benefit from significant export sales driven by the declining value of the shilling, offsetting forex effects. The manufacturing sector, including companies like Kenya Orchards, has acted as an “inflation-hedge” due to their involvement in the production of various consumables.

NSE data as of Tuesday reveals that Kapchorua, an agricultural firm, has witnessed a remarkable 105.3 percent increase in its stock value since January, making it the best-performing stock. Kapchorua has added Sh858.7 million to its investors’ wealth, resulting in a combined market valuation of Sh1.67 billion.

The smaller stocks have profited from their lower exposure to foreign investors, allowing retail investors to drive up share prices through a mix of fundamentals and speculations. Additionally, the volatility of the market, characterized by price fluctuations, has favored low-priced stocks, where even a slight price change can lead to significant percentage gains.

Investors have also capitalized on one-off opportunities in companies like Eveready, which announced a transition into new-age electric battery manufacturing. The affordability of these smaller stocks, combined with their potential for significant returns with slight price changes, has made them attractive to investors.

The gains in small-cap stocks, particularly in the agricultural sector, such as Kapchorua, Kenya Orchards, Williamson, and Eaagads, can be attributed to the advantage exporters have when the local currency loses value. Kenya Orchards’ stock price has appreciated by 87.5 percent, adding Sh117.1 million in paper wealth to investors, while Eveready saw a 69 percent increase, adding Sh103 million.

In conclusion, the NSE in 2023 has seen smaller stocks outperform larger counterparts, with the agricultural and manufacturing sectors being key drivers of this trend. These smaller companies have offered investors more opportunities for wealth creation in a market affected by currency depreciation and inflation.

Photo (Wainaina Wambu Standard)

By: Delino Gayweh
Serrari Financial Analyst
23rd October, 2023