Ideas & Debate

Why investors need to stay the course at NSE

For investors at the Nairobi Securities Exchange, respite lies in the fact that electioneering won’t arrest the  stock market in the long-term. FILE PHOTO | NMG
For investors at the Nairobi Securities Exchange, respite lies in the fact that electioneering won’t arrest the stock market in the long-term. FILE PHOTO | NMG 

At first glance, the case for investing in the Nairobi Securities Exchange (NSE) isn’t all that compelling. NASI, NSE 20 and NSE 25 dropped 2.7, 2.3 and 1.8 per cent, respectively, taking their year-to-date performance to 16.2, 14.7 and 11.2 per cent in the same order.

Thanks to politics, the country is so sharply divided that political consensus appears to fray almost daily. Still at issue, is whether the twists and turns of the political scene will lead to a prolonged downward pressure on prices.

Many are wondering; will the fractured body politic turn investors’ expectations upside down?

And will the deepening political turmoil lead to a loss of investor confidence? The simple answer is yes (in my view). However, in my article, I argue why investors need not give in to any fear.   

First, research shows that politics does not have any discernible impact in the long run. Studies have proved that though politics may move markets in the short term, it rarely does so in the long term. In other words, though political events are widely feared, and are often followed by knee-jerk reactions especially when they’re unexpected, they seldom have any lasting impact.

Underlying economic trends and monetary policy are far more important. So, if you consider yourself savvy, better tune out the current political noise.

To prove this, just look at the smart money trading the two Eurobonds. Judging by their trading levels—the five- and 10-year Eurobond yields closed at 3.8 per cent and 6.2 per cent respectively, down from 4 per cent and 6.3 per cent from the previous week, and have traded down from glorious highs of 8 per cent (February, 2016)—it appears international investors better understand this truth and actually buying more. This goes to show politics is just a passing cloud.   

Last, the rising acrimony presents a fine environment for value hunters. Worrying headlines have driven market prices so low that some of the stocks appear to be no longer reflecting their long-term potential.

If anything, history suggests that long-term investors should buy stocks after markets fall on bad political news, not sell. But that’s not to say this time won’t prove to be an exception, or that markets won’t correct for other reasons.

Moreover, with an overall dividend yield of 4.3 per cent, compared to a historical average of 3.7 per cent, buying opportunities are plenty.

Currently, price-to-earnings ratio stands at 11.9x against a historical average of 13.4x. This screams buy. So, therefore, discerning investors have to consider companies whose stocks are depressed by the lingering doubts over the election tomorrow.

As for selling stocks, my answer is “no”, at least not because of the troubles swirling around the election but simply because the long-term is rewarding.

To conclude, as a diligent investor with a long-time horizon, try not to be distracted by the political noise. What we’re seeing doesn’t really affect the economy or monetary policy, which is far important for the market than anything else.

Once this crisis is over, stocks would come roaring back. Stay the course.