There is hope for the economy and stock market in New Year

By Odhiambo Ocholla

The economy basically drives everything: Consumer spending, corporate earnings and investor psychology. The equity market, despite the fine performance in the first half of this year, is still well below its previous highs.

The NSE 20-share Index, for instance, has to rise some 40 per cent between now and next year to recapture its June highs.

In other words, this means stocks present a buying opportunity even if all they manage to do is recapture their old highs by the end of next year.

Economic outlook for 2009

When will the economy recover? When will the stock markets improve? When will things be better? We all want the answers. While I believe that the economy and the stock markets will bounce back sooner or later, the frustration lies in that we cannot predict exactly how soon that will happen.

But even though the economy slowed down in the July to September quarter, there are signs that may help indicate when it is on the path to recovery.

Here are a few to be on the lookout for:

(i) When the liquidity and housing market improves. The housing market has been in a profound slowdown because there are more available units in the high end of the market than there are buyers. Keeping as many people as possible to buy houses in the high end of the market is a necessary precondition to stabilising housing prices.

(ii) When the Diaspora remittances improve:

According to statistics from Central Bank of Kenya, remittances from the Diaspora dropped by 35 per cent between April and July from $67.9 million to $44.1 million, though it has recovered by end of the year.

(iii) When consumer spending picks up and inflation subsidises. The Consumer Price Index (CPI), an indicator of consumer spending, for last month was 29.4 per cent compared to October, which was 28.4 per cent implying that consumer disposal income indeed shrank in the fourth quarter of the year.

(iv) When GDP growth stabilises. According to estimates released by the Kenya National Bureau of Statistics the GDP slowed down in the July to September quarter to stand at 2.1 per cent, compared with 3.4 per cent recorded from April to June. It is more likely that the market going forward next year will do a lot better than this year.

A comparison of the economic fundamentals and probabilities suggest that equities market now substantially undervalued, with improved fundamentals, should produce attractive performance next year.

Stock market outlook

How should long-term investors be prepared for next year? Investors are advised to ignore what happened this year and make their decision on the expectation of future returns and not the returns that they have experienced in the past because that's a sunk cost.

It's already happened. Despite the market having a bearish trend towards the second half this year, I think going forward the market will continue to be driven by fundamentals, news events and partly by emotion.

Investors should not be distracted from seeking opportunities to capitalise on undervalued stocks that represent good values. Though Investors are understandably fearful of the market, I have a very strong conviction that there are a lot of strong buys in the market.

I think it’s a mistake for investors to pull their money out of stocks because those investors will miss out on opportunities when stocks market rebound next year.

I predict that stocks market will end next year in positive territory, but likely to trade in a V-shaped pattern. The stock market is part psychology, part fundamentals. At the best of times it is 50/50; and at the worst of times the swing factor is emotions, which go from euphoria to fear.

Unfortunately, as human beings we are not particularly good at controlling our emotions. My recommendation for the New Year is: increase your equity positions over the next six months. The market will start to recover far in advance of fundamentals. Happy New Year 2009!

—The writer is the Head, Investment Banking and Fund Management with Suntra Investment Bank.Email:[email protected]