Ideas & Debate

In NSE volatilities lie some good prospects

Nairobi Securities Exchange CEO Geoffrey Odundo during the release of  NSE’s 2017 half-year financial results last month. PHOTO | DIANA NGILA | NMG
Nairobi Securities Exchange CEO Geoffrey Odundo during the release of NSE’s 2017 half-year financial results last month. PHOTO | DIANA NGILA | NMG 

‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way.”

This classic opening in A Tale of Two Cities by Charles Dickens aptly captures the mood in the equity markets. A dichotomy of emotions and reason; I think the uptrend has miscarried.

I think not. I think it’s safe to buy the dip. I think not. Stick with the trend. No, profits are evaporating fast. Which way Mr Market? And can someone please tell Mr Politician he’s spoiling the party? Welcome to the loveless world of politics and markets.

For a long time, political risk took on different meanings with the robustness of institutions as the major differentiator. Then there was the Supreme Court decision and the distinction became clear; it is election risk.

Volatility spiked, investors took off for the hills - shares dropped over 100 points on the day of the court ruling – the shilling wobbled and all of a sudden, investor confidence was in short supply.

The decision clearly spooked a section of the market, opening a door for a big reaction. The idea that investors are going to face another rendezvous with voters pushed up their anxiety levels.

A chief anxiety for investors remains the prolonged political campaigns that may delay the “re-floating” of the market. Further, it’s possible that fear may not be the only market emotion. It’s also possible that investors that fled with whatever they’re holding just did not have a plan. 

But to complicate matters, right in the middle of the erosion, are bulls busy fronting a different argument. Despite the market being too sanguine about the re-run set on the October 17, yet in the long run they believe, election risk tends to get diminished.

They add, understandably, that markets can (and do) react negatively if political scenarios turn toxic but nonetheless believe that higher volatility means there will be cyclical swings where stocks see huge gains.

The theory here, remember, is that there’s good money to be made from exploiting short-term overreaction in markets. But for all their quiet confidence that the market risks are “tilted to the upside” on this election, they seem to be losing the battle.

So, where should you stand? Is it time to get a lot more bullish on the markets or not? Look, it does not matter. We already witnessed money flowing into stocks two months prior to the August 8th elections, ignoring the various warnings of volatility.

This means the dip provides a prime opportunity to get bullish. This time, clear you doubts and take the “long” side.