Where are financial markets headed?


Nairobi Securities Exchange stock traders. PHOTO/DIANA NGILA

Global financial markets have been extremely volatile this year, with stocks suffering from Covid-19 shockwaves, supply chain bottlenecks, and central banks tightening monetary policy.

Global consumers have had to bear higher prices as inflation has eroded household budgets and energy costs have skyrocketed.

As inflation remained high, central banks responded by raising interest rates, raising the cost of credit. The year 2022 is nearly over, and investors are looking for the light at the end of the tunnel.

Where are the world's financial markets going?

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The number one factor to consider is oil prices. US oil prices have dropped 33 per cent from a high of $126 per barrel in March to the current $84. Brent oil also peaked at $131 in March before dropping 30 per cent to the current $90 level.

This is a good trend and an indication that energy prices could drop further as we head into 2023. Kenya is expected to enjoy lower energy prices and this may have a substantial effect on inflation and the cost of living.

The technology sector has suffered the most in this bear market.

The Nasdaq 100 index, a US-based index that broadly tracks technology companies, is down 29 per cent year to date, indicating a broad sell-off in technology stocks as investors focused on energy stocks and other inflation-proof assets.

This has created a market for cheap tech stocks, and investors are wondering when they should buy them again.

Investors are watching for changes in central bank policy, energy prices, economic growth, and consumer purchasing power. When these factors indicate a positive shift, the environment may become favourable for considering a risk-on mode.

Kenya's NSE 20 share index peaked in February 2015 at Sh5,500 and has since been in a bear market. It has dropped by more than 70 per cent and is now trading at Sh1,658.

In September, the Central Bank of Kenya (CBK) raised interest rates by 75 basis points to 8.25 per cent, further tightening liquidity in response to 9.59 percent inflation.

The new administration appears to be optimistic, and if some fundamental changes are implemented, the NSE 20 could enter a long-awaited bull market.

Since the pandemic, China, Kenya's largest trading partner, has experienced a significant economic slowdown as a result of its zero-Covid policy. It faced its own set of economic challenges in 2021, including a weakening real estate market.

Recent policy changes, such as the elimination of the zero-Covid policy last week, are expected to stimulate economic activity and encourage investment in Chinese manufacturing.

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China's monetary policy is also ultra-easy, which is expected to boost growth.

As a result, Kenyans and other trade partners who get the majority of their imports from China are expected to see lower-priced Chinese imports. Lower energy prices for manufacturers, combined with lower-priced imports, are expected to lower inflation and potentially reverse central bank policy.

Global consumers, on the other hand, are expected to have more purchasing power in 2023, and aggregate demand is expected to begin recovering. At this moment, it is clear that Covid is behind us and there are lessons to learn from it, at least from an investing perspective.

Since March 2020, people have started rethinking their finances and investment strategies as the financial market technologies have made the environment virtually borderless.

Kenyans can easily buy global stocks through licensed brokers and speculate on globally traded commodities such as coffee, cotton, and oil. So, if you want to invest in stocks, why not go for the best in the world?

The current war in Ukraine and the proceeding sanctions against Russia by the west have disrupted food production and distribution thereby creating a global food crisis that has hit the global south hardest.

As countries seek to secure their food supply, investments in food production and distribution companies have increased significantly. As a result, investors should consider potential opportunities in companies that produce agricultural inputs, farming equipment, and food processing and distribution.

Top investors such as Warren Buffet are currently investing heavily in essential service companies such as waste management, healthcare, telecommunications, and banking. In theory, even if economic output slows, people will continue to pay for healthcare, waste management, and other essential services.

This gives the companies that provide such services with the ability to re-price their services while maintaining profit margins without significantly reducing demand.

In a healthy economy, private-sector investments are expected to outperform 10-year bond returns. In Kenya, however, bonds are yielding more than 12 per cent per year, while stocks, money market funds, and Sacco yields lag.

This creates an environment in which investors prefer bonds to domestic investments. So, where should you invest to earn higher returns than bonds?

Taking a cue from the current COP27 meeting in Egypt, world leaders are pushing to accelerate environmental, social, and governance (ESG) policies to address climate change and achieve net-zero emissions. This has resulted in the creation of a fund dedicated to the production of green energy.

Going into 2023, I expect companies dealing in green energy production and distribution to benefit from this funding and investors ought to look into the opportunities available.

The writer is the Lead Markets Analyst, FXPesa.