The last one year has seen share prices decline sharply at the Nairobi Stock Exchange. One of our local daily newspapers on Tuesday ran a story on the effect of the decline in share prices on four "high net-worth" individuals, including myself.
The paper proceeded to list the approximate amount of money we had "lost."
I felt the picture painted in the article may have sent the wrong signal to other investors who may not fully understand the effects of the global economic crisis and economic cycles that we are experiencing.
So here is my take on why I am still a confident investor at the NSE.
In the last few months, the global financial crisis (or is it a meltdown?) has made news headlines both locally and internationally.
Most news reports on the matter have adopted a depressing tone and no one seems ready to imagine that the market will ever recover.
It is no surprise that investor confidence has also taken a downturn, as the outlook for global equities has been negative as investors downgrade earnings expectations. As a result, share prices have declined all around the world.
In Kenya, some foreign investors have sold their shares at the NSE, while Kenyan shareholders have also been buffeted by other domestic factors which include tighter monetary conditions exerted on the economy in the middle of 2008; poor harvest in the same year and the negative impacts of the post 2007 election violence.
While these domestic factors have burdened the retail end of the stock market to a greater extent than the institutional segment of the market, I as a retail investor, still have confidence in the stock market.
Please, don’t think I am crazy!
Instead, appreciate that in 2009 and 2010 we should see the effects of these domestic factors begin to ebb away as a more normal harvest comes through this year and monetary easing that began in January starts to work through the economy.
As the economy strengthens then the stock market should rally in response to the improving outlook for the economy. This development in local economic conditions will be in sync with the global economic recovery that is now widely expected to commence in 2010.
It is important for investors to always remember that today’s share prices should reflect all available information. In my view, current market prices are not underpinned by the fundamentals of the economy and current levels most investors are over estimating the downside risk for the market.
Share prices have already fallen by 50 percent and at current market valuations are at 2003 levels, which marked the start of the 2003- 2006 Bull Run. Remember that time, when you made lots of money on the NSE?
Economic cycles come and go. Today we are experiencing a global down swing in economic activity. It is important to note that the stock market typically starts to rally well ahead of the economy’s own recovery.
In the case of Kenya, I expect confidence will rebound quickly especially amongst the institutions, and high net worth investors who are probably better attuned to the state of the economy. These savvy investors will lead the market out of this bear run we are experiencing.
Finally, investors should remember that you can’t make money if you refuse to invest. Standing on the sidelines until you are 100 percent sure the market is rising is not very clever.
All the money will have been made by the time you join the rest!