Developed markets stock markets have been on a roll for a few months now. The US Dow Jones is at a record, the Nasdaq is back at 1999 highs, and from Europe to Asia we are at records.
The rally has been relentless with the EMBI [Emerging Markets bond Index] at its tightest spread for about three years. Emerging markets have come back into favour with Narendra Modi’s India leading the charge.
Of course, the US is tightening, but the equity markets appear to be comfortable with the Federal Reserve’s incremental and gradualist approach of 25 basis points a pop.
Valuations are stretched on a P/E basis but what I have learnt is that momentum is a powerful beast and right now it continues to point higher. South African assets had also been on a roll until President Jacob Zuma decapitated Pravin Gordhan [former Finance minister] in his midnight strike, and the rand promptly reversed course.
The rest of Africa had badly lagged this global rally. Here in Nairobi, the All Share crashed -10.11% from the start of the year through March 8. The Nairobi NSE20 slumped -12.467% through January 30 when it closed at a multi-year low.
Everyone I spoke to was ready to throw in the towel. Over on the West side, Nigeria’s All Share was -8.53% through March 6 of this year. Ghana has been a stand-out this year, but overall the sub-Saharan Africa’s markets started the year seriously in the doldrums.
Well, we have seen quite a meaningful rebound of late. The Nairobi All Share is now +3.34% in 2017 and at a six-month high, the NSE-20 Share Index is also at a six-month high. The Nigerian All Share is now +4.9% in 2017 and at a nine-month high and just came off an eleven session winning streak. There has been a significant mood change.
These deadline numbers, however, veil an even more extreme performance at the individual stock level. Sure you can buy the indices, but you would have missed some simply alpha and exponential gains. Safaricom has rallied +26.9875% off its 2017 closing low, while KCB is +45.8% off its 2017 lows. Kenya Airways is +16.23% in 2017.
Of course you still have to exercise a strict stock-picking discipline because there are some counters which increasingly look like they have entered a death spiral [Mumias Sugar is an example]. Local institutions have been driving the rally in Nigeria, and here local institutions [with some exceptions] are massively underweight at the equity market.
They have been snaffling up government bonds for a number of years now. Soon, they will have no option but to re-enter the equity markets, otherwise their performance will be woeful in the comparison. So I am expecting momentum to build. Of course, with an election in August and food inflation at 21% year-on-year, Caveat Emptor still applies.
Aly-Khan is a financial analyst.
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