It’s 2025. A good year to learn and relearn good investment habits and unlearn bad ones.
Separating noise from good signals will be particularly essential. It can be quite confusing when red lights are blinking on the economic dashboard while the markets go ahead and stage a massive come-back.
The Nairobi Securities Exchange (NSE) had a standout 2024, ending lack-lustre years that preceded it. The All-Share Index, 25 Share Index and 20 Share Index posted 34, 42 and 33 percent returns, respectively.
Nonetheless, 2024 witnessed the economy slowing in the first half (4.8 percent) compared to a similar period in the previous year (5.5 percent) and second half numbers are expected to be weaker, if not terribly weak. Notably, private sector loans fell to 0 percent as of October partly as a result of the prevailing high interest rates.
Possibly, banks were disinclined to lend owing to rising non-performing loans (NPLs) -NPLs to gross loans stood at 16.5 percent in October 2024.
So, what really powered the resurging stock market? Was it the 150 bps rate cut (25 bps in August, 75 bps in October and 75 bps in December)? Was the market playing its leading indicator role?
Markets go wherever they want to go. Sometimes they move without any real shift in fundamentals. Sometimes, they stay silent. Sometimes, they predict the economy.
Believers in the latter see the stock market as a sentiment indicator that can impact the economy either negatively or positively. In our case, this may be the main factor-market playing a leading indicator role with fundamentals expected to catch up later.
And here is where we have some comfort. Although the Central Bank took an aggressive approach dealing with inflation, it acknowledged keeping the key rate high is hurting the economy. No surprise the bank’s monetary policy committee (MPC) signaled in its 33rd Bi-Annual report its desire to further ease to support economic activity.
Suffice to say, reducing interest rates should see more appreciation in equities. Additionally, increased inflow towards higher-yielding paper should be expected as investors seek to improve returns and liquidity.
Looking ahead, I bet there’ll be at least another 150 basis points (bps) cuts in the new year. Of course, this considerably assumes oil prices tumbling further, weather patterns remaining favourable and global central banks maintaining the loose monetary policy path.
Overall inflation needs to remain inside the well telegraphed target band of 2.5 and 7.5 percent. This is because low inflation will be key to supporting continued strength in equities in 2025.
In December 2024, inflation inched upwards to 3 percent, up from 2.8 percent a month earlier but remains significantly low from a two-year high of 9.23 percent. Also, it's good to note that treasury market yields are hinting at benign inflationary pressures.
A few major metrics to keep an eye on include: fiscal deficit below 5.5 percent, at least 15 percent rise in profitability in 2024 full year returns for listed equities, the purchasing manager’s index remaining above 50, trade balances at 5 percent or lower and the improving geo-politics around the Middle East.
The writer is the managing director of Canaan Capital
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