Ideas & Debate

Market terms are right for long-term investors

Market conditions are pointing to a good run at the NSE, which should wipe out fear among investors. FILE PHOTO | NMG
Market conditions are pointing to a good run at the NSE, which should wipe out fear among investors. FILE PHOTO | NMG 

Once upon a time in 1993, an RnB group by the name of Mint Condition released a now classic jam, “U Send Me Swinging”.

Growing up in my generation, we jammed to this song. Fast forward to 2017, the song still rocks but another group of people are dancing to a different swing—investors.

Since January, markets have been on a tear. Up 21.9 per cent year-to-date, equities are ripping higher faster than one can say “Shakalaka”. But there is a problem.

Every push higher seems to be raising more questions than answers. Are these inflated expectations? Are stocks finally in “strong” hands?

Is the environment good for risk? It’s unclear. But that said. For long-termers, the strength of the present rally need not become a riddle. Only one question is key; is this the birthing of a long-term rally? Simple answer: Yes.

Here’s why I think so.

One, it is important to remember that markets move in cycles – a cycle up is followed by a cycle down and then a rewind starts  again. In our case, I believe the bull is charging again. Technically speaking, we are overdue.

Stocks have already broken through important resistances. Even more telling: the 3.2 per cent post-election rally (August 9th -11th) demonstrates a gain in confidence.

Two, looking at the Jubilee manifesto, I find reasons to be optimistic. Though “Uhuronomics” failed to attract the fancy of investors (from March 2013 to August 2017, investors lost 16.5 per cent of their portfolio values), this term, his “borrow-spend-build more” policy could spark investor interest.

Reason; the convergence between investor optimism and an expansionist agenda is always a potent mix for sustained market rallies. 

So, for his infrastructure plan - housing production of at least 500,000 affordable homes, 7,000 kilometres under construction, phase two of the standard gauge railway – infrastructure-linked stocks (ARM Cement, Bamburi Cement, Crown Paints, E.A. Cables) may indeed get a lift.

Three, with the President’s legislative majority, policy making is bound to be a smooth ride. An important point for long-termers. What does this mean to the average investor?

For many of today’s investors who’ve lived through the two fairly nasty bears—a decline of 57 per cent from 2007 to 2008 and a 49.11 per cent plunge from 2015 to 2016 – there is no reason to remain spooked. It’s time to re-allocate back into equities again.

Remember, like bear markets, bull markets also come in all sizes. The smallest bull-market gain was 61 per cent; the largest was (wait for it) 320 per cent, from 2002 to 2006.

Moreover, though over the past 26 years bear years have accounted for about half of this time period, stocks have risen more than they have declined.

For your information, the worst of the bear markets was only a 35 per cent drop (2008) compared to the best of the bull market, a 115.3 per cent (1993) rally.

So, back to the original question. Could this rally be a multi-year bull market? Hard to say with 100 per cent certainty, but all fundamentals point to a sustained resurgence.