Clever investors will wait until the bear run is over

Opinion and Analysis

 

Fly540 staff board a plane at Wilson Airport in Nairobi. JamboJet, a subsidiary of Kenya Airways, and Fly540 are the two main airlines that serve the local towns in Kenya. PHOTO | FILE |  NATION MEDIA GROUP

By RUFUS MWANYASI

Over the last seven months the market has been decimated. In a decline largely attributed to rising interest rates, weakening currency and faltering global economy, the NSE 20 Share Index and all-share have lost up to 19.8 per cent and 15.2 per cent respectively.

Last month alone, investors were treated to the most tumultuous month in the year as the market tumbled a whopping 11.4 per cent.

So what will September bring? Firstly, I would expect volatility to persist as investor fears become even more pervasive. Markets Average True Range (ATR), a measure of volatility, doubled its one year average reading.

August ATR stood at 1.882 while its 12-month average stood at 0.85. For this reason, investors will continue to witness high volatility and especially because the market has yet to show any signs of a reversal.

Secondly, investors will wait anxiously to see whether the Federal Reserve will follow through and actually raise interest rates for the first time since 2006.

A rate hike may translate into more losses for the local currency, a scenario which could compound an already dire situation — the local unit has so far lost 13 per cent of its value against the US dollar.

What’s more, a weakening shilling means less incentive for foreign investors to invest and if local interest rates rise on this basis, then more pain is expected on listed companies’ performance.

Thirdly, the market is likely to remain in an “analytical mode” after the release of the Q2 numbers.

Banks, which often lead the earnings season and which played a key role in the three per cent jump in share prices in the first quarter despite posting slower quarter-on-quarter pre-tax profit growth, have now tanked considerably following slowest growth in half-year profits in six years.

Other companies that have released Q2 results include Kenya Re, Longhorn Publishers, I&M Holdings, Pan Africa, and BOC Gas.

Finally, the Consumer Price Index (CPI) is set to command extra attention this season. Over the past 12 months, the cost of living has largely remained “flat”, a scenario which sometimes affords the market a period of respite.

This is seen throughout last year when inflation rates remained below eight per cent.

With the August inflation dropping to 5.84 per cent from 6.6 per cent and seven per cent in July and June respectively owing to favourable weather conditions; this is certainly good news for the market.

So, what should happen to restore stability in the markets and give investors some clearer direction through close of the year? Firstly, the bear market needs to run its full course. Attempts to catch rebounds will be tantamount to “portfolio suicide”.

Secondly, investors will need to see proof that the shilling will not depreciate further which has the potential to exacerbate foreign investor outflows.