How the political transition will affect investment climate – Business Daily
History said that the markets would be volatile leading into a general election. History was right. The Nairobi Securities Exchange (NSE) 20 Share Index is down some 6 percent in a year to date with most foreign investors busy on the sell side.
Yields on the seven-year (issued in 2019), 10-year (issued in 2014) and 30-year (issued in 2018) Eurobonds have on average risen over 300 basis points to close at 13 percent, 12.2 percent and 12 percent since the beginning of the year to date.
Likewise, yields on the 364-day, 182-day and 91-day papers have adjusted upwards. In the same period, the shilling too has lost 5.5percent of its value against the dollar.
So it is true that increased volatility has become woven into the investing landscape even without the impact of elections. But it is a week after Election Day and the outcome of the races already decided, what is the potential pathway for the markets?
In the short term, there’s no need to panic about market volatility. If election uncertainty has caused prices to move widely, then that creates an opportunity to buy equities.
Personally, if I have to pick a market to take risk on, it’s got to be the stock market. Dividend yield stands at 5.6 percent currently, 160 basis points above its 10-year average.
From their July lows, equities have been on a rally mode bagging over 15 percent gains since. Yes, government securities are offering higher yields but for diversification purposes, you may need to balance your portfolio across asset classes and within asset classes.
In brief, present volatility is your friend. It could be used to meet your “long-term” goals at a better price that can potentially give you better-than-average returns over time. In the long run, the election outcome will have a major impact on policy, laws and the investment environment.
Granted, it’s still early days to discern what sectors will be most likely to be affected. But soon, investors will have to evaluate how the new policies that are going to be championed by the newly elected administration will affect the economy.
More than any other policy issues, the high government debt issue, high cost of living and taxes will be key variables. In addition, it also follows that a split in power at the Senate and the National Assembly will play a major role. If the ruling party will have their way, stocks are likely to benefit.
To stay well guarded against any unfavourable policies, you’ll need to maintain all the components of a diversified portfolio in place and then stick to a longer-term strategy that’s designed for more than one general election cycle. Fight the intense pressure of short-termism.
Returns are made over a full business cycle, which is longer than even one general election. This is why it’s important to keep a big-picture perspective. The best rule of thumb is to stay invested and make sure your portfolio is rebalanced whenever necessary.
