CAN MACROECONOMIC INDICATORS BE USED AS PREDICTORS OF THE STOCK EXCHANGE INDEX TRENDS? A LOOK AT THE NAIROBI STOCK EXCHANGE

Abstract

The factors influencing the investor’s decision to invest in the Stock Exchanges are well documented, yet an investor cannot consistently maximise returns and minimise risks. The literature mainly focuses on the individuals as investors and their reactions to statements from the respective firms or experts or the government projections (political or economic). What is not very certain in literature are the potential effects that macroeconomic Indicators on the stocks exchange index trends. The implication of this is that there are relationships between the stock exchanges index levels and the Macroeconomic Indicators such as inflation rate, money supply among others, that even if they do not directly impact on the index levels of the stock exchanges, they influence individuals to either increase or decrease their portfolios. On this basis, the study investigated the relationships between Nairobi Stock Exchange index trends and the Macroeconomic Indicators in the country. Correlations can either be positive or negative but more importantly when the correlations between the NSE index trends and the Macroeconomic Indicators are either leading, or lagging, they can inform the investors to either increase or decrease their portfolios thus aiding the maximization of returns and the minimisation of risks. The data was gathered from Nairobi Stock Exchange (daily market reports), Kenya National Bureau of Statistics (Statistical Abstracts) and the Central Bank of Kenya (Monthly Economic Reports).The coefficients for the logarithms of treasury bills, money supply, and real exchange rates were positive, while the signs of Inflation Rates and Gross Domestic Product were negative. The 91-Day Treasury Bills and the Inflation rate were the only clear Leading Macroeconomic Indicators on the NSE 20- Share Index. The money supply and real exchange rates showed that they were both leading and lagging Macroeconomic Indicators on the NSE 20-Share index. Hence they cannot be used to proxy the share prices. The gross domestic product showed the weakest relationship with the NSE 20-Share index. The study concludes that the Kenyan stock market and the formed significant relationships with all Macroeconomic Indicators identified, except the gross domestic product.