Oversold Nairobi Securities Exchange (NSE) has struggled to make a comeback, suggesting that investors are still worried about something bigger.
Still, economic fundamentals are not giving red flags of a recession.
Are we there yet? Has the big low – the lowest low before the upturn – arrived yet? Have we seen the last of the bears? This is a tough call.
Oversold Nairobi Securities Exchange (NSE) has struggled to make a comeback, suggesting that investors are still worried about something bigger. Still, economic fundamentals are not giving red flags of a recession.
In fact, dip-buying appetite appears to have stirred a bit in the past few weeks. So, which way Mr Market? Have we hit the bottom yet or is the recovery a long-distance down the road? Honestly, no man knows but today, let’s comb through history and see some indications on this subject.
First of all, based on studies going back to 1945, bear markets - defined as stock prices falling 20 percent or more - have historically averaged 30 percent and lasted 13 months. When that milestone has been hit, it takes stocks an average of 21.9 months to recover.
From its peak on April 2017, the NSE has skidded some 1,000 points or a 30 percent drop. The whole trip lasted 13 months. If this bear market is anything like the past, it indicates that we’re at the bottom and that we should prepare for a long time of recovery.
Secondly, blanket pessimism tends to dominate bear markets. Of course, there is plenty to fret about – mass layoffs, zombie stocks (read: negative equity), increasing profit warnings, companies debt-burdened, et cetera.
However, when good news isn’t enough to hold off sellers and despite solid economic conditions, prices continue tanking; it’s usually a sign of a market bottom.
And the fact is we have macro-positives in galore getting ignored. From muted headline inflation (3.83 percent), growing private sector credit (according to CBK data, private sector credit grew by 6.3 percent in the months to August, compared to 6.1 percent in July, the fastest pace since 2016), relatively calm political climate to stable shilling, et cetera.
Are we there yet? Well, history shows that sentiment begins to change when contrarian buyers take the lead. And do we see signs of contrarian buying? It’s hard to tell (plus it’s difficult to follow this signal). The best play for you and me is to buy now.
Lastly, you typically don’t get a real bottom until the analyst recommendation starts reading the same.
Looking at analysts’ reports beginning Q2 to end of Q3 2019, you’ll notice plenty of recommendation cuts (around the same names) compared to the same period last year.
Now, whether it’s the Fear of Standing Out (F.O.S.O.) or just plain herd mentality, this is always a good sign to call a bottom.
When analysts believe that there’s going to be a lot of fallen angels, guess what, you might actually catch an “angel”.
To close, as the market slowly comes off (or not) one of its worst bear episodes in the past three years, it’s helpful to know what a bear market is and how it unfolds. In the meantime, history also reminds us that bear markets are usually shorter than bull markets. Cheer up.
Mr Mwanyasi is managing director at Canaan Capital Limited.
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