I am currently rereading my investment bible, Security Analysis written by Benjamin Graham and David Dodd. The book is still as relevant as it was in 1933 when it was first written.
What stands out in the book is the need to buy stocks at discounted prices, or those which are undervalued. Such stocks are usually difficult to get these days as investors have more information today than they had in 1933. However, I took a good look at the Nairobi Securities Exchange (NSE) and noted that there is more than meets the eye.
The fact is; we are experiencing a bear run.
This year has been a difficult one at the market. The NSE All Share Index (NASI) began the year at 162.9. By the time of writing, it had dropped to 147.6. This was a reprieve considering that, by August 27, the NASI had fallen to 137.5. To date, the market has shed off 9.39% in one of the longest bear runs.
This is in contrast to the 2014 performance where the NASI closed the year with a 19.9% gain, coming second only to Dar es Salaam on the continent.
There are many reasons why the NSE is shedding value. Firstly, the government introduced an unpopular capital gains tax which worked against the market from day one. The tax has since been abolished.
Secondly, and more importantly, the international investment climate is still recovering from the 2009 recession. Investors are still very jittery and, at the slightest provocation, they move their money to safe havens. Internationally, most investors believe the United States (US) is the safest place for their money and so, at the slightest tension, there will be a capital flight to the US.
This year began with uncertainty around the Greek problem and a subdued Chinese economy. These two factors drove foreign investors to believe that they should be cautious and most of them sold their holdings and took their money to the US. This strengthened the dollar, driving the forex rates of other currencies through the roof, the Kenyan shilling included.
If there is bad news in the market, to the effect that a considerable number of investors are selling, other investors will also sell without knowing why. It has a ripple effect. The international pressures caused only half the paper loss, the other half was due to fear and panic by other investors.
Nevertheless, prices of many counters have gone down. It is naturally a loss to many, but is there a silver lining in this dark cloud?
To understand this, one needs to check the best performing industries of last year. The champions of 2014 were the insurance industry and the agricultural sector. In 2015, the major gainers of 2014 are in the red. Britam has shed off 41.5% since January. CIC Insurance, the best price gainer in the sector in 2014, has shed off 26.04% this year. Pan Africa Insurance suffered the most, having lost 45.42% in the year.
There is no doubt that the insurance industry is expanding in Kenya, with the growing middle class requiring a wide array of insurance services. Furthermore, actions by companies like Britam create an investment appetite as the adjustments herald a growing stock. Yet these companies have lost significant value and present a great opportunity to a long-term investor looking for discounted stock.
But the attraction is not only in insurance. Housing Finance, ARM Cement and Total Kenya are all in the red, presenting opportunities for growth.
The end of the year is approaching and many investors are looking for value investments that will make 2015 worthwhile. If Security Analysis is anything to go by, then there is a real opportunity in the Nairobi bear run.
Tellingly, bear runs present investors with a great opportunity to buy choice stocks at prices much lower than the actual value. So while many are making a flight from the bear, embrace it and give it a bear hug, it might make you rich.
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