Four must-have stocks in 2015 as economy looks up

Playing the stock market and winning is never easy. And honestly speaking, stocks have had a harrowing 2014. But you will be pleasantly surprised when you find out there is still money to be made in stocks in 2015. You will only need to pay close attention to the monetary policy environment.

Let me spend a few minutes talking about the economy and the markets and then I’ll move right into some specifics. With the exception of the slump in tourism numbers, 2015 should be a good year for the economy.

First, to compensate for the plunging tourism numbers, the government plans to spend heavily on infrastructure, hence boosting liquidity; as a result, GDP could grow in the quantum of 6 per cent, which is considerably higher than the 5.3-5.5 per cent projections for 2014.

Second, the economy will receive significant support from plunge in oil prices through lower pump prices. And for consumers, the plunge in oil prices and further cuts in pump prices could lead to a greater level of disposable income, which will, in turn, lead to increased demand for goods and services (which could be some piece of good news for a consumption-driven economy like Kenya’s).

Oil prices are still expected to remain low in 2015. Well, the global oil market is too complex a system to be forecasted accurately because of the various demand and supply influences.

But taking into consideration all the expected demand/supply dynamics, there seems to be a general consensus on $70 a barrel as the average oil price forecast for 2015. This will still be very good for the economy. It will mean little or no worries for inflation watchers and could also result into a very relaxed interest rate environment.

So in 2015, inflationary environment is expected to be low and Kenya government will ramp up its spending and help boost overall liquidity. Consequently, the Central Bank of Kenya could loosen its monetary policy stance in 2015; and in fact, we could see the first rate cut as early as March. Stocks tend to thrive in such conditions.

And here’s why I mentioned the need to pay close attention to monetary policy environment in 2015: it’s because, generally speaking, stocks have an inverse relationship with short-term interest rates.

A very loose monetary policy regime (and a subsequent low interest rate environment) combined with a high liquidity environment could see stocks post better returns in 2015.

Exactly which stocks should you buy in 2015? To profit from this expected bull market, there are four stocks any investor should own in 2015—namely Equity Bank, KCB, Safaricom and East African Breweries Limited (EABL).

Why? First, they have fairly good fundamentals and will still find innovative ways of continuing to embed themselves in our lives.

Second, these stocks are highly liquid and move volumes in the market; in fact, over the last 36 months, they have accounted for 60 per cent of stock market volumes.

Thirdly, they are the biggest beneficiaries of foreign investor activity; over the last 24 months, foreign investor activity on the four counters have accounted for 60 per cent of their total turnover.

Forget people who tell you that there is no relationship between the level of foreign investor participation and stock valuation; these stocks, as a result of heavy foreign investor presence, have consistently beaten the market.

In 2014, they’ve returned an average of 30 per cent compared to the market’s three per cent. In 2013, they returned an average of 53 per cent compared to the market’s 19 per cent.

The only risk to watch out for these four stocks is the possibility of rate rise by central bankers in Europe and US, especially in the second half of 2014, which could see foreign investors reduce exposure in emerging markets.

Mr Bodo is an investment analyst