When the government recently announced a 4.3% GDP growth, skeptics’ pulled out their media wit and shot down the coveted figure as unrealistic.  The argument is that the current poverty situation, widening wage gap and stagnated FDI tells a different story.  Most critics went ahead to base their argument on the unchanging or rather worsening poverty line and increasing number of the unemployed.  This has come at a time when the world over is fighting over the write off of debt by the globalized economies during the G8 Summit.

Just before this clamor ends, the Kenyan stock market seems to have been hit by its oracle; this time, it is not the usual kind you hear at Omaha (Warren Buffet) but a more speculative one.  More than ever before, the Kenyan Stock Market has experienced growth never recorded in a long time before.  Stock prices have reached a 10 year high and they don’t seem to stop rising.  Traded volumes are rising by the minute.  The only two non-variables are the numbers of listed companies and new players (offering investment advice, share related information, trend analysis etc) save for the Central Depository Services Corporation (CDSC) that is now on its second year.  My worry is, could the envisaged stock growth, as fast as it is be a true reflection of the market status or a short term speculation that is bound to get stocks at one time tumbling to a near zero. 

At the moment, what matters to many is that their investment, whether long or short is reaping good returns and as more and more people run to their broker, the prospects only seem to be getting better and better

To understand the trend in today’s market, it is important to understand the concepts that are falling into play.  The finance pro and a starter both apply the concept of market efficiency.  As the former does it knowingly, the latter does it unknowingly (in the subconscious.  This is a concept based on the availability of market relevant information.  

Karl Pearson in his discussion on the random walk theory in the early 1950s explained the randomness of stock prices using the example of a drunkard.  This, he related to the optimal search procedure for finding a drunkard left in the middle of the road.  If the drunkard can be expected to stagger in a totally unpredictable and random fashion, he is likely to end up closer to where he had been left than any other point. 

True as this may be, it may not hold water in the current inefficient market.  In finance, it is a popular thought that this analogy is applied to a series whose excessive returns are serially independent. Researchers in the 1950’s were for the first time able to use electronic computers to study the behavior of lengthy price series.  The assumption of economists was that one could analyze an economic time series by extracting from it a long term movement or trend for separate study and then scrutinizing the residual portion for short-term oscillatory movements and random fluctuations. 

Projecting on the same in the Kenyan context may not offer the best results.  However still, it is perfectly correlative in most traded shares.  The Industrial and Allied Sector, which tops the bourse in volumes, fits the match perfectly.  Mumias Sugar Company shares that have become the most traded stock in Kenya fit in this.  Its trend analysis would be the analyst’s best defense based on the 1950’s research.  Its share price has moved from as low as Kshs. 8 in April 2004 to Kshs. 25.00 in July 2005.  With the uncertainty in the sugar industry that has called for importation of sugar, this could be in retrospect.  So what more could be driving the sale of this stock?  The case may however be different for a case like that of Kenya Airways that has also moved from a low of Kshs. 11.00 in April 2004 to Kshs. 39.00 in July 2005.  This, someone can easily align with the restructuring of the company, new corporate identity, focus and industry’s positioning. 

Kendall examined 22 UK stock and commodity price series and in his findings concluded, “in a series of prices which are observed at fairly close intervals, the random changes from one term to the next are so large to swamp any systematic effect which may be present.  The data behaves almost like wandering series.”  If this is the case, does it mean that the popular stock prices could be misleading?  Does it mean that the coveted Mumias share could at one time slump far below the previous trade price of Kshs.9.00 or that the recently split East Africa Breweries could drop from Kshs.150.00 following the recent government measures on alcohol? 

Such a trend poses a lot of risk and uncertainty for the investor.  At the same time it presents a wonderful opportunity for the short-term deal maker who may not be up for a long term gain. 

Industry analysts at Investopedia warn that one should never buy a stock without analyzing a company’s business plan.  This comes with analyzing the industry.  One should know whether its sales are increasing year after year or trending down.  Then one has to know what the company does.  Many of us may know what Kenya Airways’ core business but who knows what BOC Kenya or Eagads does?  Some of these shares, however lowly priced may not present real returns, however the long term investor would be better investing in such for a long term gain than a short term one.  I would still press harder for an industry with good earnings growth forecasts. 

At times, it is not usually a good idea to only rely on the market analyst’s views of investing if you understand an industry well. Even in high growth markets like the US, market analysts were once under fire for not being able to see the tech industry implosion and more recently advising investors to buy shares of Enron Corporation shortly before the energy trader filed bankruptcy. However, Money central advices that analyst’s information is crucial because people are interested in gross numbers and not in estimates accurate to the decimal points. 

Again, analyze industry’s growth prospects carefully to be able to reach to a decision on where to put investments.  For example, industrial and allied is accounting for 79% average of all traded volumes.  Based on this, it is undoubtedly clear that investors will find better prospects in Industrial and Allied sector than they would go for the Main Investment Market Segment. 

As people walk in the investment maze with the analysts yapping their buy and sell slogans on the trading floor, the market is really looking good, and more than ever before, this is the best time to turn to the stock market for long term financial independence.  Companies planning to get listed should act quick while the market is not just driven by company specifics but speculative aspects, otherwise, the future may not be as exciting as today is.  Matter of fact, we truly have a thriving stock market, whether the analysts are right or wrong.