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January 17, 2019

A brutal start to 2017 at the NSE

Kenya Airways CEO Mbuvi Ngunze and chairman Michael Joseph on November 4 last year /ENOS TECHE
Kenya Airways CEO Mbuvi Ngunze and chairman Michael Joseph on November 4 last year /ENOS TECHE
It’s been a brutal start at the Nairobi Securities Exchange in 2017. The Nairobi All Share Index has slumped -7.05 per cent since the start of the year and closed Friday at a 40-month low. The Nairobi All Share peaked at a record high of 176.00 on February 20, 2015, entered and exited a bear market in October 2015, and again in January and July 2016 before firmly entering a bear market in August last year. A classic bear market is one where an index has fallen 20 per cent from a peak. The Nairobi NSE20 Index is -6.75 per cent in 2017 and closed below 3,000 on Friday, a level not seen since 2008. The NSE20 Index peaked on February 27, 2015, at 5491.37, entered a bear market on August 28, 2015, and is -45.89 per cent since the February 2015 high.
 For those who hold to the Efficient Markets Hypothesis, they would argue that the market is a forward looking animal, and the securities exchange is simply pricing in sharpened political risk (we are after all in an election year). The market is further pricing, in that banks (the banks constitute an outsize weighting at the securities exchange) will no longer be able to shield the damage post the interest rate cap, and 2017 earnings will naturally look poor in comparison with 2016.
 My view is that just about everything negative is now baked into the price. Baron Rothschild is credited with saying “the time to buy is when there’s blood in the streets”. He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. The world’s second wealthiest person Warren Buffett has warned: “You pay a very high price in the stock market for a cheery consensus.”  So my first overarching point is that valuations are at rock-bottom levels, and it is at these moments that the smart investor sits up and takes notice.
 In these kinds of bearish conditions, it’s important to pick your spots. Just buying the index is not an optimal strategy. We have witnessed serious divergences in price performance. It’s therefore a more Darwinian environment. Steer entirely clear of companies that have had a history of corporate governance challenges except for Kenya Airways where the chairman, Michael Joseph, is on a ‘’personal legacy’’ ‘’national interest’’ type mission and will not be denied. Buy Safaricom at these discounted levels. Safaricom is an outstanding machine and on the radar of every investor across the world. The only banking share to produce a positive return in 2016 was Standard Chartered. I expect that outperformance to continue. KCB and Barclays Bank also look good value. KenolKobil was a big outlier in 2016 and a gently rising oil price is a gentle tail-wind for 2017.
 This is a moment to be agile.
 Let me leave you with French cultural theorist Paul Virilio: “We are facing the emergence of a real, collective madness reinforced by the synchronisation of emotions: the sudden globalisation of affects in real time that hits all of humanity at the same time, and in the name of progress. Emergency exit: we have entered a time of general panic.’’
Aly-Khan is a financial analyst.
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