Pricing the Passage

Editor’s Note

Throughout the week, almost everything that benefits from lower oil and lower geopolitical uncertainty rallied together. Equities rose, bonds recovered, the dollar depreciated, and crude oil prices fell after officials from the U.S. and Iran signalled that commercial passage through the Strait of Hormuz could resume during the ceasefire window. By Friday, the S&P 500 had gained 4.5% on the week, with the Nasdaq rallying 6.8%, with both indices reaching record highs.

This was a market that decided that the oil shock might be moving away from a structural threat toward a temporary disruption that could fade without causing lasting damage. Large banks such as JP Morgan helped reinforce that view. Their earnings showed investors that the first quarter’s geopolitical volatility had boosted trading revenues substantially, while management’s commentary stayed cautious but not worried. The market gladly accepted that combination as it showed that the conflict was bad enough to generate volatility income from them, not bad enough to materially affect the consumer or credit performance.

The issue with the current market setup is that it is starting from a much higher base. When a market is near lows, even a small improvement in sentiment can trigger a stronger rally because investors are already positioned for bad news. But when a market is near record highs, hope alone carries less value. Expectations are already elevated, meaning valuations leave less room for error, and any disappointment can matter more. The weekend’s developments are likely to make that clear. Iran reimposed tighter control over the strait, vessel traffic stalled, and President Trump accused Iran of violating the ceasefire and threatened strikes on bridges and power plants. Iran’s President Pezeshkian reiterated that Iran would not surrender what it sees as its nuclear rights.

The S&P 500 reclaimed a record close on Wednesday before finishing Friday at 7126.06, while the Nasdaq extended its winning streak to 13 sessions (trading days). Reuters noted that the S&P had never previously recovered from a 5% to 10% drawdown back to a fresh high in only 11 trading sessions, highlighting the speed of the recovery. The rally was supported by hedge funds, and sector flows into tech, industrials, and healthcare. What investors were really buying was not necessarily peace, but a lower probability of the worst case scenario playing out. Iran’s assurance that commercial passage through the Strait of Hormuz would remain open during the ceasefire pushed oil prices lower, and investors had less need to move money into the U.S. dollar, which is often treated as a safe-haven currency during periods of stress. Markets interpreted this as a reduced risk of a prolonged energy shock that would have lifted inflation expectations and forced central banks to keep rates elevated. Even so, with the U.S. blockade of Iranian ports still in place, the disinflation trade looked more optimistic than the geopolitical backdrop fully justified.

Bank earnings then gave the rally a stronger foundation. JPMorgan Chase & Co. reported a bigger than expected rise in profit, helped by record trading revenue. Citigroup posted its highest quarterly revenue in a decade, with markets revenue up 19%. Bank of America attained record equities trading revenue, with Morgan Stanley also reporting record equities trading. Management teams were not particularly gloomy, which reassured investors that the first quarter’s geopolitical instability had not weakened business activity and was unlikely to do so immediately. This helped markets conclude that conditions were not as weak as feared, giving investors more confidence to invest even more in equities.

There were also signs that the market’s tolerance for mediocre narratives is falling. Netflix beat first-quarter expectations, but its shares fell more than 9% after an underwhelming revenue outlook and the surprise announcement that Reed Hastings was stepping down from its board. In a market majorly influenced by geopolitical relief, that is an important message. Investors are willing to overlook macro risk if they see earnings durability. They are much less willing to forgive fading growth credibility.

The other area worth watching is Europe. As oil prices fell on Friday, traders reduced the chances of an immediate rate increase, and policymakers at the European Central Bank spent the week arguing against premature tightening despite a clear energy-led rise in inflation. The ceasefire trade not only helped equities rally, but also eased concerns that the oil surge would push inflation higher and force central banks to take a tougher stance on interest rates.

With the rally, all time highs, and the shifting view among policymakers on rates, this weekend matters in a unique way. Iran restored tighter restrictions on passage through the Strait of Hormuz, with passage effectively returning to a standstill. Trump said Iran violated the ceasefire, and U.S. envoys were ordered back to Pakistan for another push at a deal before the two-week truce expires. This is why developments over the weekend and early next week will be especially important for markets, as investors will be watching whether the ceasefire can still be preserved, whether the strait remains disrupted, and whether the recent rally has enough geopolitical support to hold.

_{^{Here, we recommend reducing allocation to names priced for perfection and instead rotating toward undervalued sectors where expectations remain more reasonable and upside potential is less dependent on perfect execution.}}

Kenyan markets also participated in the improved global tone, but only modestly relative to developed markets. The NSE All Share Index (NASI) closed Friday at 208.13, gaining 0.54%. The NSE 20 rose to 3,606.52, reflecting an increase of 0.45%, while the NSE 25 rose to 5,756.90, a gain of approximately 0.25%. The key point is not that Kenya failed to rally, but that the move was more restrained than the global relief trade.

The key domestic macro event was the fuel price adjustment. The Energy and Petroleum Regulatory Authority initially raised Nairobi pump prices to KSh 206.97 per litre for petrol and KSh 206.84 for diesel, while kerosene was left at KSh 152.78. This represented increases of 16.1% for petrol and 24.2% for diesel from the previous pricing schedule. The government then moved quickly into damage control. On April 17th, President William Ruto assented the Value Added Tax (Amendment) Bill, which slashed VAT on petroleum products from 16% to 8% in a move aimed at quelling the uproar that arose following the sharp hike in prices. As a result, the price of petrol is now down to KSh 197.60 per litre with the price of diesel now down to KSh 196.63 per litre.

This reduction now makes the equities implications more complicated. The issue is no longer whether inflation will rise and force the Central Bank of Kenya to remain cautious. The new concern is whether lower VAT collections will weaken fiscal revenues at a time when Kenya already needs strong fiscal buffers. If KRA collects less than originally targeted, the budget may come under pressure, potentially reducing the government’s ability to fund spending priorities and meet debt obligations without additional borrowing or external support.

This is why Kenya’s request for rapid World Bank support is crucial. Kenya is trying to manage an energy shock while protecting growth, preserving hard-currency reserves, and limiting public unrest caused by higher living costs. The CBK has already lowered its 2026 growth forecast to 5.3% from 5.5%, citing risks from the Iran war to key sectors of the economy. What cushions the situation is Kenya’s hard-currency reserves, which remain above $13 billion, equivalent to 5.8 months of import cover. This provides an important buffer against external pressure, helping the country absorb higher petroleum import costs.

Currently, the most affected parts of the local market remain the fuel intensive and price sensitive parts of the economy, such as transport, consumer cyclicals, and manufacturers with small pricing power. The more resilient segment remains high-quality banks, because of their domestic deposits, liquidity, and earnings resilience.

_{^{We recommend reducing allocation to stocks most directly affected by higher oil prices, and instead prioritising names that are better insulated from fuel-driven cost pressures.}}

_{Last Week’s Review}

Last week, our global trade idea was an equal weight position in JPMorgan and Citi which worked well. JPMorgan’s five day move was 0.14%, and Citi’s was 6.26%, which implied a 3.20% gain on an equal-weight basis.

Our Kenyan trade idea was flat for the week. Using the recommended weights of 20% in Equity Group Holdings, 35% in KCB, and 45% in ABSA, the combination returned 0.14% for the week.

_{This Week’s Trade Ideas}

_{- Global Trade}

_{UnitedHealth Group Inc (NYSE:UNH)}
This week, we are going with a single stock selection, with UnitedHealth Group being the name in focus. The company reports its first quarter results on Tuesday 21 April, and the setup is attractive because the stock could benefit from two supportive forces: a broader market rotation into defensive sectors, and the recent improvement in the Medicare Advantage policy backdrop, which may give investors a clearer recovery narrative. We see the most important variable being management commentary on Medicare Advantage margins, pricing, and the outlook for the rest of the year.

_{- Kenya Trade}

_{Equity Group Holdings (NSE:EQTY), KCB Group (NSE:KCB), Absa Bank Kenya Plc (NSE:ABSA)}
The trade remains the quality-bank basket, but the weights should change. We recommend trimming Equity to 10%, raising KCB to 45% and keeping Absa at 45%. The reasoning is as follows: Equity has already seen a substantial rise from when it was first recommended two weeks ago. KCB by contrast, had rallied before pulling back this week, which offers reversion potential. Absa remains jointly the largest-weighted position in the portfolio because it offers meaningful upside based on our valuation while also benefitting from a stronger corporate and multinational client base.

Our focus this week centres on three themes.

The Pakistan Talks - The first focus is on the next round of talks and whether they produce something operational. Markets can live with a temporary framework if it keeps traffic moving and lowers the probability of renewed escalation. Without a concrete change to shipping conditions or the U.S. blockade, markets will likely sell off from current levels.

Broader Earnings & Guidance - We are also focused on the wider earnings and guidance cycle, particularly because this week’s includes a mix of defence, industrial, and consumer-facing names. The defence sector can provide insight into government spending and how elevated global tensions are affecting the sector. Industrial names such as Steel Dynamics and 3M will be important, as their guidance can offer a clearer read on manufacturing demand, margin pressures, and broader economic momentum. The state of the consumer will also be a key focus, especially through companies such as Procter & Gamble. Its results and guidance will help show whether households remain resilient, are trading down, or are beginning to show signs of pressure from higher living costs.

Kenyan Inflation & Foreign Investor Participation - The immediate issue is whether the VAT reduction and revised fuel prices are enough to meaningfully reduce inflation pass through. The other important factor is foreign participation in the stock market. If foreign investors view the VAT reduction and revised fuel prices as supportive for near-term stability, Kenyan equities could benefit from improved inflows.

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