ASIGMA Market Report: 2024 Quarter 1

Equities 

Market Overview 

Major Indices Performance 

The first quarter of 2024, saw robust performance in East African equities, with general growth across all markets reflected in the respective all-share indices. The Uganda Securities Exchange (USE) experienced a remarkable start to 2024, boasting a growth of 22.86% in Q1. The good performance is partly aligned with the economic growth that is estimated at 6% by the Bank of Uganda (BoU) as well as the bottomed-out inflation which continues to stay below BoU’s target of less than 5%. 

Similarly, Kenya experienced a reduction in its inflation rate, dropping from 6.6% in December 2023 to 5.7% in March 2024. Despite this, it remains above the targeted rate of 5%. Nonetheless, endeavours such as reducing fuel prices have been undertaken to mitigate inflationary pressures. The Dar es Salaam Stock Exchange (DSE) at 2.26%, and the Rwanda Stock Exchange (RSE) at 0.54% recorded more stable performances across the quarter in comparison.

Local Stocks Performance 

The top 5 gainers on the USE for Q1 2024 were Equity Group, KCB Group, East African Breweries, National Media Group, and Kenya Airways. The performance of Equity Group is attributed to the growth of its subsidiaries’ net profit contribution by approximately 33.3% (USD 116 M).

On the other hand, the only losers on the USE in Q1 2024 were Airtel Uganda, NIC Holdings and MTN Uganda. Airtel Uganda was recently listed on the USE in Q3 of 2023. The telco experienced a 13% decrease in its share price, dropping from UGX 100 to UGX 87, four months after its Initial Public Offering (IPO). 

Key Market Events 

The USE enjoyed a robust first quarter in 2024 and a significant contributor to this positive performance is the wave of dividend payouts announced by several established companies. Among others, the listed companies that gave out or declared dividends to their investors in Q1 2024 include Stanbic Uganda Holdings Ltd (UGX 3.03 per share), Equity Group (KES 4.0 per share), East African Breweries PLC (KES 1.00 per share), Airtel Uganda (Shs2.15 per share) and Quality Chemical Industries Limited (UGX. 1.6 per share). 

Equity Group continued its impressive streak by proposing a dividend of Kshs.15.1 billion for the second consecutive year out of the FY 2023 earnings per share amounting to Kshs.11.10. Additionally, the company was ranked as the 2nd Strongest Banking Brand globally and clinched the 1st position in Africa with a Brand Strength Rating (BSE) of AAA+ in the 2024 Brand Strength and Brand Value rankings conducted by Brand Finance. 

Stanbic Uganda Holdings Limited saw a 15.2% surge in yearly net profit fuelled by Stanbic Bank Uganda’s increased net interest income. SBU recorded a 16.8% boost in total income, and a 12% rise in profit before tax on the way to a dividend payout of UGX 3.03 per share. SBU started the year with a share price of 32.00 UGX which appreciated by 6.25% by the end of Q1. 

Global Highlights 

AI-Backed Growth in S&P 500 

The first quarter of 2024 also witnessed an impressive performance of the S&P 500 index, marking a quarterly growth of 10.2%. With 385 gainers and 114 losers, the first quarter of 2024 showcased broad-based participation across sectors, setting an optimistic tone for the remainder of the year.  

Leading the charge were standout performers such as Super Micro Computer Inc. which saw an extraordinary growth of 255.3%, reflecting the increasing demand for innovative tech solutions. Nvidia Corp also demonstrated substantial growth, recording an 82.5% surge driven by advancements in artificial intelligence and gaming technologies. Additionally, Constellation Energy’s remarkable growth of 58.5% in the energy sector highlights the momentum towards sustainable energy sources. 

Outlook 

Regionally, the markets have generally shown growth within the quarter owing to the relatively stable inflation rates within East Africa. There is an expectation for continued growth in the NSE market, buoyed by favourable trends like a drop in inflation and the resilience of the Kenyan shilling against the US dollar. To lower inflation further, the Central Bank of Kenya raised its interest rate, aiming to bring price increases more in line with their 5% target. This move has generated optimism in the Kenyan market for investors. 

On the national level, the USE is also expected to continue moving upward in Q2 of 2024 given the promising outlook of Uganda’s economy considering the bottomed-out inflation that is expected to keep below 5% in the near term and the projected economic growth of (5.5-6.5) % by Bank of Uganda.  

Fixed Income  

Market Overview 

Interest Rates

Yields on Uganda’s government bonds across all tenors increased during Q1 2024 in comparison with the end of Q4 2023. These increasing bond yields ought to attract more fixed income investors to lend and finance government operations.

In line with this, GoU had a UGX 3.5 trillion supplementary budget approved by the Ugandan Parliament in December 2023. As a result, the Ugandan government held a private placement bond auction with selected institutional investors in February 2024 where UGX 1.3 trillion was raised.  

Central Bank Policy 

One significant factor contributing to the increased yields on the 10Y government bond is the recent 50 basis points increase in the Central Bank rate from 9.5% to 10%. The tightening of the monetary policy (contractionary monetary policy) was implemented in response to the increasing depreciation of the Uganda Shilling against the United States Dollar, which was caused by increased core inflation rate from 2.4% in January 2024 to 3.4% in February 2024, as well as the increased demand for foreign currency by local manufacturers who source raw materials and machinery from foreign countries.  

Regional Analysis 

Global Fixed Income Markets 

Throughout the first quarter of 2024, the United States Federal Reserve (Fed) maintained its interest rate in the range of 5.25% – 5.5%, like the end of 2023. This is because the US Fed is still waiting for inflation to drop to their target of 2%. A quick move to reduce the US Fed interest rate could see inflation rates rise again, which could have adverse effects on the US and global economy.

The US inflation has ranged between 3.1% and 3.4% in Q1 2024. As a result of the Fed keeping rates constant, the US yield curve remained inverted in Q1 2024. Despite the inversion, long term yields gradually increased as we approached the end of Q1 which could be an early indicator of a potential return to normality. 

Interest rates in the European markets were also kept constant in Q1 2024, with the United Kingdom maintaining its interest rate at 5.25% and the European Central Bank maintaining its interest rate at 4.5%. However, if the trend of reducing inflation in these regions continues, interest rate cuts may be implemented in the subsequent quarters of 2024.  

In contrast, Q1 2024 saw the Bank of Japan raise its Central Bank Interest Rate for the first time in 17 years after multiple years of quantitative easing. Additionally, this is the first time the Bank of Japan will have a positive Central Bank Rate since 2016. In March 2024, the Bank of Japan raised their interest rate from -0.1% to a range of 0% to 0.1%. 

Regional Fixed Income Markets 

Bond yields in selected African markets such as Kenya and Nigeria have been rising in Q1 2024 in comparison with a year ago. Hyperinflation has persisted in Nigeria, with inflation rates rising from 28.92% in January 2024 to 31.7% in March 2024. In response to the rising inflation rates coupled with the depreciation of the Nigerian Naira against the United States Dollar, the Central Bank of Nigeria raised interest rates to 22.75% (from 18.75%) in February 2024 and to 24.75% in March 2024. The rate hikes are intended to create more macroeconomic stability in the Nigerian economy.

Similarly, there has been a rise in bond yields in the Kenyan fixed income market from the end of Q4 2023 to the end of Q1 2024, with the yield of some treasuries rising by more than 200 basis points in the first 3 months of 2024. The increase in yields is a result of the Central Bank Rate hikes by the Central Bank of Kenya from 12.5% in December 2023 to 13% in February 2024.  

It is key to note that the Kenya Central Bank has been increasing its rate throughout 2023 from 8.75% in January 2023, a move intended to control inflationary pressures in the Kenyan economy. The February 2024 rate hike was partly influenced by the need to control inflationary pressure in Kenya, which has been partly successful as Kenyan inflation has reduced from 6.9% in January 2024 to 5.3% in March 2024. 

In addition to the treasury instruments, Kenya also issued a USD 1.5 B Eurobond in Q1 2024 and a KES 70 B (USD 532 M) Infrastructure Bond. The Eurobond has had a positive effect on the macroeconomic condition in Kenya such as appreciation of the Kenyan Shilling against the Dollar.

Risks and Opportunities 

Interest Rate Risk 

The moves by the Central Bank of Uganda and the Central Bank of Kenya to raise their Central Bank Rates implies there will be an increase in the prime lending rates and retail lending rates in the respective economies. This will increase the cost of capital and overall cost of doing business in Uganda and Kenya. 

The increasing inflationary environment, as well as the interest rate hikes in Nigeria indicate weak economic performance of the Nigerian economy which can hinder its growth, especially if the current hyperinflation doesn’t reduce after the recent interest rate hikes in the country. This can also lead to lower consumer and investor confidence, higher unemployment as well as adverse effects such as a recession. 

On the other hand, the rising yields of Ugandan and Kenyan treasuries could present an opportunity for increased returns for fixed income investors.  

Outlook 

Q2 2024 may see the first interest rate reductions by major Central banks such as the US Fed and the ECB. However, this is dependent on the continued decline in inflation rates to Central Bank targets that are typically in the range of 2% (for major economies) to 5% (for smaller economies).  

In a bid to further strengthen the Nigerian Naira and improve the inflationary environment in Nigeria, the Central Bank of Nigeria is expected to issue a Eurobond in 2024. Despite the Central Bank Rate hikes to 24.75% in Nigeria, further interest rate hikes are expected in Nigeria, especially if there is no significant reduction in the persistent hyperinflation in Nigeria.  

Regarding the local fixed income market, CBR should remain constant in Q2 as this will contribute to the reduction of inflation rates, and further result in appreciation of the Uganda shilling exchange rate.

Currencies  

Market Overview 

Major Currency Pairs Performance 

Q1 2024 witnessed dynamic shifts and notable trends across major currency pairs, reflecting a complex interplay of global economic factors, geopolitical developments, and central bank policies.

The EUR/USD pair saw notable volatility in Q1 2024, primarily influenced by expectations of diverging monetary policies between the European Central Bank (ECB) and the Federal Reserve (Fed). The euro appreciated against the US dollar, reaching a high of 1.1026 at the start of January before experiencing a slight correction in mid-February, closing March 20th, 2024, at around 1.0845. 

The GBP/USD pair exhibited mixed performance throughout Q1 2024, fluctuating within a broad range due to diverging central bank policies and Brexit-related uncertainties centred around trade agreements, regulatory frameworks, and the overall economic impact of the UK’s withdrawal from the EU. To the point that some reports note that, by almost every economic and financial measure, Brexit has had a negative impact on the UK, with the country’s economy becoming less competitive compared to the EU, further weighing on currency market sentiment. 

The British pound held steady at $1.27 as at the end of March 20th, 2024, hovering around its weakest level since March 5th, amid growing speculation that the Bank of England may cut interest rates in the summer fuelled by a sharper-than-expected decline in the British inflation rate. 

Regional Analysis 

Ugandan Shilling 

In February, the Ugandan Shilling depreciated by 3% against the US Dollar, peaking at 3,906 Shillings, but later eased to 3,843 Shillings by March 21, 2024. The US Dollar’s rise was due to tighter monetary policy, including a Central Bank Rate increase to 10%, aimed at stabilizing the currency amid rising inflation from 2.4% to 3.4%. over 2024 Q1. External factors, like the outflow of offshore investor funds, also impacted the Shilling’s performance. 

Kenyan Shilling 

In the first quarter of 2024, the Kenyan Shilling has significantly appreciated against the US Dollar, marking a notable turnaround from the previous year’s depreciation. Positive factors, including a USD 1.5 Billion Eurobond issuance, a Central Bank Rate hike to 13%, and funds injection from the IMF and Trade Development Bank loans, boosted investor confidence and stabilized the Kenyan Shilling. Moreover, the over-subscribed Ksh.70 billion Infrastructure Bond issued by the Kenyan government further strengthened the currency’s outlook, fostering economic growth and reinforcing investor faith in its resilience. 

Rwandan Franc 

In Q1 2024, the Rwandan Franc has shown stability, credited to robust economic growth propelled by investments in construction, tourism, and agriculture. Merchandise exports increased by 1.7% in 2023, with construction activities rising by 12%. The Rwandan Franc’s resilience is also fuelled by the real GDP’s higher-than-expected growth of 8.2%, driven by tourism, trade, agriculture, and construction. The ongoing construction of Bugesera airport, road projects, and private housing initiatives have contributed significantly. These factors collectively underline Rwanda’s economic strength and its currency’s stability amidst evolving market dynamics. 

Nigerian Naira 

In recent months, the Nigerian Naira has experienced a significant decline, dropping from 881 to as high as 1,572 against the US Dollar due to various factors. A change in the market regulator’s rate calculation methodology signalled de facto devaluation, driving demand to unofficial markets. High import dependency strained foreign reserves, leading the Central Bank to float the exchange rate, exacerbating pressure on reserves. This depreciation worsened inflation, impacting purchasing power and triggering protests. President Bola Tinubu implemented measures to stabilise the economy but removing gas subsidies and unifying exchange rates faced backlash, compounding economic hardships for Nigerians. 

In the first quarter of the year, the Nigerian Naira has faced significant challenges, culminating in a sharp decline from its initial value of 881 at the beginning of the year to as high as 1,572 against the US Dollar. This dramatic depreciation can be attributed to several intertwined factors that have exacerbated the country’s economic woes. 

Q2 Outlook 

Entering Q2 2024, global currencies face pivotal moments, influenced by monetary policy shifts. Inflation rates worldwide are gradually declining, nearing central banks’ targets. Key currency trends include the USD, poised to maintain strength despite nearing the end of a tightening cycle, supported by structural factors like AI advancements and energy independence. The Euro is expected to weaken against the USD due to diminishing yield differences and subdued external sentiment, while the GBP follows a similar trajectory. Inflation prospects are uncertain due to global and domestic factors, including geopolitical tensions affecting commodity prices. African currencies’ outlook varies, with some stabilizing while others struggle. Notably, the Ugandan Shilling is expected to strengthen, backed by robust monetary policies.