The Nairobi Stock Exchange will remain volatile for most of 2008 reflecting the turbulence in the political arena, analysts said.

A report by CFC Financial Services says the prevailing political uncertainty will dampen the performance of the economy in the short to medium term and that the market could not be expected to be immune to the expected dilution of the macro-economic data or the political climate.

"We expect the stock market to remain volatile in the short term as the country grapples with the political challenges," said the equity market report says.

Since the year began, the NSE has shed Sh44 billion in market capitalization from a high of Sh851 billion at the beginning of the year to Sh810 billion as at the close of trading yesterday - a five per cent drop.

During the same period, equity turnover has declined by almost 30 per cent from daily trades worth Sh505 million on December 24 last year to Sh347 million at the close of trading yesterday.

"With the short term direction of the market likely to follow events on the political arena, it would be advisable to take a long term view of things" said Mr Odhiambo Ocholla, the manager for investment banking and fund management at Suntra Investment Bank.

Economists had predicted a slow down in the economy pointing to a dip in tourism revenues, disruption of agricultural production and lower business turnovers in the wake of recent political turmoil.

CFC Financial services analysts are however optimistic that the economy might get a soft landing and that recovery could get underway beginning the last quarter of 2008 onwards as government re-embarks on its developmental and infrastructural spending.

The report is in tandem with the view of business leaders and stock pickers that a speed resolution of the current stalemate and rejuvenated investor confidence is key to a speedy economic recovery and renewed momentum in the equity market.

"Investors should temper their expectations for the year as a slowing economy, volatile political climate and declining corporate earnings could lead to a falling equity market," said the CFC report.

While most firms are set to announce record earnings for 2007 led by the banking industry, this year's outlook remains dim following the disruptions to businesses witnessed in the first quarter of the year.