The Nairobi Stock Exchange (NSE) has been facing a full blown bear run. The bourse has seen a massive drop in share prices to a three years low. Compared to its regional counterparts, the NSE has registered the biggest loss so far since the beginning of the year.

The bear run at the NSE is attributed to several factors including the post election violence witnessed in the country early in the year. This diminished the economic outlook of the country by affecting key sectors such as transport, tourism and Agriculture, which in turn scared away investors.

The global effects of the increased oil and food prices have also increased the inflation rate in Kenya to 28%, constraining households' budgets and reducing the investment capacity of many. The Safaricom IPO, one of the largest in Africa, made many retail investors to loose confidence in the market after the share performed poorly on listing.

Little can be said about the effect of the current financial crisis in the United States of America that is threatening to turn into a global catastrophe. The relation between the US market and frontier markets such as the NSE is not yet clearly known but the effect will surely reach us. The NSE has been in the last few years said to be over-valued compared to its regional counterparts, with an average market price earning (P/E) ratio of over 20 while other East African markets like the Dar es Salaam Stock Exchange (DSE) and Uganda Securities Exchange (USE) have had a P/E of less than 15.

Regardless of all these, it is wise for investors to understand that investing in a bear NSE is much different and difficult than investing in a bullish one. The recent few years have been very bullish and many investors were attracted to the bourse for this reason. Some of them ended up becoming mere bullish speculators with a short term view in their every investment decision. But with the bear run hitting the NSE so hard, most investors have been left counting paper losses and wondering when this drop will end.  

A stocks market bear run is a market condition in which the prices of securities are falling, and widespread pessimism causes the negative market trend to continue for a long while. In such a market, investors would anticipate losses and continue selling their securities at even lower prices, which contributes to further pessimism. A downturn of more than 20% in the market indexes for over two months, is considered a bear run in the stock market.

Investing in a bear market is usually very tricky as it's usually difficult to know when the market is bottoming out or just having a small hiccup. Unlike a market correction, which is a short-term negative trend that lasts less than a month and often presents a great opportunity for investors to find low entry points, bear markets rarely provide any entry points. In most cases, buying in a bear market will be a case of catching a falling knife with only painful results to follow. The only thing to do in such a market is keep a level head and seek as much information as you can.

It's at such times that many investors see the importance of investing through an advisor. Good information is worth more than gold in a bear market and will help you a great deal in making strategic moves that will eventually grow your investment, even if it is only marginal growth. Additionally, diversifying into low risk securities such as bonds and treasury bills, which give low but sure (fixed) returns on investment. A well balanced investment portfolio in equities, fixed securities and money market (with less investment in stocks) will cushion your investments from losses.

As hard as it is to know when a bear run starts, knowing when it ends is equally difficult. There are some common signs that can signal an end to a bear run, such as if an upwards blip goes on for more than three weeks or the market index indicates a plateau for more than a month coupled with improved economic conditions e.g. reduction in inflation rate. These signs usually do not indicate certainty that the bear run has ended.  

At the moment the, the NSE is showing none of these and the economic future, both locally and internationally looks bleak. It would be wise to assume that the market will be on a downward trend for the first quarter of next year. Investors are thus much better off holding their funds in cash and fixed assets that appreciate in value than investing in the stock exchange.

Kevin Mwanza

Finance Manager,  IREN Kenya