When it comes to investing, everyone wants a sure thing. Most of the 2003 to 2006 period has been a sure one. Like in any other country however, the presidential cycle can bring everything to a complete stop. The Presidential Cycle is the period in which a sitting president stays in power before elections can be held again. In most African countries, this period comes after 5 years. For Kenya, it is 2007.
As this period of uncertainty nears, investors are worried about the possibility of a crash, price adjustment or usual market breathe. However, considering that most investors are undaunted, majority may just forge ahead.
The recent price rally is not a strange phenomenon. Infact, one may argue that it’s been a profit taking ploy by investors and may go on until mid next year. The premise holds that stock returns are higher in the second half of the presidential cycle than in the first half.
Can one therefore argue that political actions affect stock returns? If yes, then such an argument would be taken at face value by chartists who deny that market efficiency holds. The Presidential Election cycle fosters periods of instability, investor confidence as reflected in total equity returns. In November 2001, the NSE 20 Share Index was at 1400 just before the 2002 election year. It did not appreciate much until February 2003 election results boosted investor confidence pushing the index to 3200 points. A major breathe later in November 2004 brought it down by around 700 points to close at 2500. After 2005, activity has been moderate but following new listings, the index has crossed the 5000 mark and may be headed to 7000 as we await new listings by very stable companies in the coming months.
Will the new wave of political campaigns make it hard for investors to keep pace with the market? Will investors ‘profit take’ and look offshore? Will companies we anticipate to list postpone their strategies until the post election period?
I am more apt to rely on history as a predictor of the future than emotions, thoughts and beliefs. And more precisely, I hold to the fact that long term forecasting is less scientific than short term as it involves a lot of ‘what ifs’.
Suppose a new government takes power in 2007, one can easily argue that it will distort the processes, systems that have been put into place in order to steer the country into greater heights of success by the year 2012 when the country elects a new president. Put another way, one may say that the current government has showed the nation what they can do and it is time to give others a chance. In light of this, a new government will bring new ideas and steer the reform process mainly focusing on areas that the current government has ignored for the past 5 years.
On the flipside, supposing that the current government goes back to power, one may argue that they will complete projects they had started and start those they had anticipated to. Looking at it from a different angle, we may see a slowdown in activity considering that their ideas may not be influenced by any vibrancy since they’ve already done their job. These are possibilities on two extremes but at the end of the day, one of the two will take the lead, and just as the Abba song goes, “The winner takes it all.”
Whether your side gets it all or not, what’s the worst that can happen? Everyone fears electing a government that fails to deliver and dwelling on promises at times doesn’t deliver. That leaves many people thinking whether to maintain their investing momentum or slow down and seek other options.
If things don’t look good, we are not tied. We have many options. My best hedging technique would be a slow down on highly volatile counters. This shouldn’t mean that my cash lies idle. Looking out for major options will also be crucial. Among the viable options will be companies whose line of business is not likely to me affected by political downturns. One can also cash in on IPOs which may be many. However, with the massive numbers, it will also be important to look at prospectuses more keenly.
In addition, one can also consider diversification mechanisms among which are offshore, fixed income securities and non financial investment options. Whatever the option one goes, it’s important to choose wisely and tread carefully at this time of uncertainty.