Question from a friend: "Big brother Rufus, will stocks do well post-Covid-19 season?"
Me: "The wind blows wherever it pleases. You hear its sound, but you cannot tell where it comes from or where it is going. So it is with the markets."
Well, this response often disappoints. It is not what people want to hear. But the truth is I truly do not have a clue and it seems only a few wise souls appreciate that. Sure, I make (educated) guesses and sometimes they do pan out very well but at the end of the day, they are still guesses.
If you're willing to listen to an educated guess to guide your investment decisions, why not just go to a casino and have some good fun? But let me illustrate this further.
Today, let's see how a quick educated guess looks like.
Observation: Equities have been trading inside a wide consolidation range since the start of April. Coincidentally, around the same time the Central Bank of Kenya (CBK) laid out a number of actions namely; the Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) from 7.25 per cent to 7 per cent and also cut the Cash Reserve Ratio (CRR) from 5.25 to 4.25 per cent.
Consequently, a month later, in an industry report released by CBK (Presentation on the Status and Outlook of Kenya's Banking Sector), it shows that 18 commercial banks and two microfinance banks had been granted approval to access Sh29 billion freed from the reduction in CRR - accounting for 82 per cent of the Sh35 billion freed by the one per cent reduction in CRR.
Further, Sh273 billion worth of loans are reported to have been restructured representing 9.6 per cent of the total loan banking sector loan book of Sh2.8 trillion. Credit to private sector growth is shown at nine per cent a clip. Inadvertently, it seems the intervention could have supplied the "price floor" we've all been yearning for.
Prognosis: It's highly likely that prices will hold to break out upwards in the near term. Therefore, current consolidation presents an entry point. Support for this expectation is seen in the fact that NASI is already trading at higher levels since early March as equities continue to reclaim ground lost in a bear market slide that began in February as the Covid-19 pandemic took hold.
In value terms, prices are dirt cheap - price to earnings ratio (P/E) stands at 8.5X and spot an average dividend yield of 5.6 per cent.
Technically-speaking, the benchmark index (NSE 20 Index) finds good support at trading levels witnessed two decades ago - in 2000 and 2003.
With that said, should investors bust a move based on this educated guess? Again, I have no idea, but good luck. But for our comfort, we can draw wisdom from the wise man of old, "Cast your bread upon the waters, for after many days, you will find it again. Divide your portion among seven, or even eight, for you do not know what disaster may befall the land."
Stated differently, do your best to stay diversified always and keep farming for the long term as men do not have all the answers and don't know what the future holds.