Is it safe to go back in the water? Some think yes, at least, going by market action last week. The benchmark Index (Nairobi Securities Exchange 20 Share Index) booked some 100 points up from the previous week (which incidentally was the yearly lows).
But can we confidently assume the expectations for a painful downturn have been fully embedded into the equities market? Are investors mispricing future expectations: profitability, yield or growth, at the current levels? Can we safely say the extreme psychological damage is now behind us?
Honestly, the verdict is yet to arrive, I think. It is also tough to make a sure call when you have plenty of macro-economic indicators deteriorating. And so, when no one knows how the economic recovery and a return to normalcy might look like, it's prudent to err on the side of caution.
In the meantime, this is how the macro-landscape looks like: inflation slowed to 6.1 per cent (year-on-year) in March compared with a rate of 6.4 per cent in February. Producer prices also decreased by 1.47 per cent in March 2020 compared to the previous month. Private sector credit grew 7.7 per cent in the 12 months to February 2020. Current account deficit is projected at 4-4.6 per cent of GDP in 2020 due to the global shutdown (although lower oil prices are expected to moderate the impact), according to the Central Bank of Kenya (CBK).
CBK reduced the Cash Reserve ratio (CRR) to 4.25 per cent from 5.25 per cent and cut 100 bps off the Central Bank Rate (CBR) to 7.25 per cent. It is worth noting that Interbank rates are up north of 5.5 per cent by last Friday, 100 basis points higher from the day when the CBR and CRR cuts were made. Testament of liquidity imbalances within the banking system?
All the above means MPC meetings won't be thinking about raising policy rates until long after the pandemic has passed and likely not until 2022.
Other gauges of economic activity remain/projected to be broadly weak. According to the monthly Stanbic Bank Purchasing Managers Index (PMI), Kenya recorded a score of 49 in February signalling a second successive drop in business activity—readings above 50 signal an improvement in business conditions on the previous month, while readings below 50 show deterioration.
The index dropped from 49.7 in January, and was the lowest recorded in over two years. Shortages of raw materials also inflated total costs, linked to reduced imports from China due to the coronavirus outbreak.
Economic growth is expected to decline significantly from the estimated 6.2 per cent to possibly 3.4 per cent, according to the Central Bank of Kenya (CBK). Back to the starting question; how would we know the stock market bottom is in? An important tell-tale would be offered when economic activity begins to rebound.
For now, the fundamentals of the economy remain un-supportive of any bullish stance.
For traders, if the index re-tests and holds at the current level, it would suggest that lows are in play and the worst has already been priced into the markets. Otherwise, it would suggest that some really tough times are ahead. At best, we can likely expect several weeks or a few months of chop as the market finds a bottom.
Mr Mwanyasi is MD, Canaan Capital Limited