What we should look out for in current market recovery

There’s a lot to be glum about the market—and the world, really—at the moment. Nairobi Securities Exchange (NSE)-listed companies have been in the midst of a prolonged earnings recession marked by mass layoffs, insolvency fears and profit warnings. In the process, many investors have been left bruised (despite many false signals of a recovery).

A series of pullbacks since 2016 have seriously damaged investor confidence. This is why many are questioning whether the new rally has any lasting value (stocks took out new highs in the month of October with NSE, NSE 20 and NSE 25 posting 9.7 percent, 8.8 percent and 13 percent increases, respectively). I am also contending with the same.

Is the rally a reliable leading signal? Will the rebound end the quarter in positive territory for the year? Can the recovery be sustainable amid a corporate earnings recession? The answer in the affirmative will be subject to these three key conditions happening.

First, and perhaps most important of all, if the repeal of the rate cap law takes place, then it is possible we have a new cyclical bull market. The removal of interest rate caps should eliminate what has been a powerful disincentive for banks to lend to the private sector (growth in credit to private sector grew by about 6.3 percent in August 2019).

Judging by the recent market’s reaction (NCBA Group #ticker:NIC, Equity Group #ticker:EQTY and KCB Group #ticker:KCB jumped 30.7 percent, 24.2 percent and 23.2 percent, respectively) on the Presidents refusal to assent to the Finance Bill 2019 and recommending a repeal of the rate cap, certainly, a repeal would serve as a vital bullish catalyst.

Secondly, if the government reins in on its borrowings, then we could further support for market prices.

According to fiscal data by the Treasury, Kenya’s deficit grew to 7.7 percent of GDP in FY2018/19 from 7.4 percent in the previous year – missing the target in FY2018/19 (of 6.8 percent of GDP).

This has resulted in the crowding out of the private sector credit growth. In addition, measures to rebalance the public debt portfolio towards lower cost and longer-maturity debt could create positive spillover effects on the market.

Lastly, if the local macro-environment remains broadly stable with low inflation and a manageable current account deficit, it could help re-inspire the depressed market sentiment. Although, year-on-year inflation for the month of October increased to 4.95 percent from 3.8 percent recorded in September, it’s largely remained benign. Headline inflation has averaged 5.2 percent in the 12 months to September 2019 due to lower energy prices.

Besides, if the local currency and business sentiment (Purchasing Managers’ Index (PMI) reading rose to 54.1 in September, up from 52.9 in August) remains stable and positive, then we expect market volatility to remain subdued. Moreover, Kenya’s growth prospects are expected to be positive over the medium term according to World Bank.

If these three conditions materialise, then, we possibly could experience a new cyclical bull market. Although the gains will be hard won (we still have a number of global macro and local economic headwinds), the market could “rise a great distance” in the coming months.