Why market might work for you despite rise in policy rate

Opinion and Analysis

A Nairobi Securities Exchange staff monitors trading on a digital screen. It will possible to trade from mobile devices from July. PHOTO | FILE 

 

By RUFUS MWANYASI

In Summary

• Securities investor has had a long time to prepare for recent increase in the policy rate.

There appears to be little fear in the market indeed. The NSE 20 Share Index which gauges overall market performance and hence sentiment of players, lost a meagre 0.02 per cent last Wednesday —
the day following the 150 basis rate hike decision — and by last Monday had more than overcome these losses by climbing one-third of a percentage point to close at 4,744.6 points.

It is probable that the market shrugged off the rate rise because they saw it coming. As a result, investors took to buying ‘dips’ hence supporting the prices.

But are stocks a bit too complacent in regard to the rate hike? Is this a temporary win for bulls? Should investors disregard the developing signs of weakness already showing?

The market is only off seven per cent year-to-date. Perhaps the best way to answer these questions is to first find out the basis of this market optimism.

Possibly, investors are banking on a myriad of factors. Key amongst them being the Central Bank plans to defend the shilling.

The regulator is reported to be in the money market with an aim to mop up billions in excess liquidity. By absorbing excess liquidity, the bank makes it costlier to hold dollars, which in turn supports the shilling.

So far, the local unit has retreated 2.8 per cent from the psychological Sh100 level.

Other positive factors include the scrapping of the capital gains tax, falling inflation — May’s inflation eased to 6.8 per cent from an eight-month high of 7.08 per cent as well as bucking a three-month uptrend — ongoing economic policy reforms and expected 6.9 per cent gross domestic product growth this year.

But is this enough to hold up prices? I think so. Here’s why.

As explained in my previous article, rate rises are negative to market returns but affect bonds and stocks differently. In a rate rising environment, bonds get punished almost immediately but it takes a while before stocks start to feel the pain.

Historically, stocks have been shown to rise considerably during tightening of credit. Besides, I think the market has had a long time to get ready for a rate increase.

With the economy set to grow at its fastest rate in over seven years, the Central Bank is likely to start raising rates. Typically, this is enough to push stocks higher when interest rates start going up.

It is after the rates are above, at or near all-time highs — which can take years — before market returns are affected.

Having said that, is the time right to start piling into stocks? Yes, but only in sectors or stocks which thrive in a growing economy with rising rates.

However, investors need to be careful and do their own analysis. None of this analysis means that the share market will rally this year. History is under no obligation to repeat itself. Nor is there any guarantee the Central Bank will continue raising rates.

Of importance, rather than worrying about how the Central Bank policy might affect the market--which you can’t control — it could be more profitable to focus on your own investing temperament, which you can.

Realise that stocks are volatile, rate hikes happen abruptly, and the unexpected regularly happens. Doing well, as an investor relies more on your ability to accept market swings than your ability to forecast them.

Mr Mwanyasi is managing director, Canaan Capital Ltd. Email: pmwanyasi@gmail.com