Opinion: Is Buying the Dip Really the Best Option Now?
One of the most successful formulas in investing in the past three decades has been `buy the dips.’ Investment advisors could identify scores of rags to riches stories of investors who gained from that strategy.
Since its inception in the 1950s, the Kenyan equity investors have weathered the Iraq war, the Asian crisis of 1997, the tech bubble burst aka the dot com bubble, the Global Financial Crisis of 2008, the taper tantrum of 2013 and of course, the domestic quake of demonetization in 2019.
This time again the crash is being seen by seasoned investors as an opportunity to `buy the dip’ and benefit from the equities rally and economic growth that would come by once the lock-down is lifted. If one ranks the crises investors faced in the past three decades, it would undoubtedly be the Global Financial Crisis of 2008 that forced every central bank and governments to come to the rescue of their markets and economies.
Every equity index has climbed astronomically in the past thirty years. These have been backed by substantial gains in productivity, and earnings. This time again the bet is that earnings would grow.
This is rather unprecedented with no economic activity unlike post-Lehman when the main street was functional. Never was there a situation where plumbers and carpenters got locked up without even livelihood. Even during demonetization, transactions were taking place, even if it meant barter.
After being in denial, there’s acceptance that Kenya’s economy could shrink by some estimates as much as 5 percent the worst in memory. What happens to corporate earnings, the cornerstone of equity valuations? That’s even worse than in 2008, when a cocktail of post-election violence that killed more than a thousand people, drought and the global financial crisis curtailed output in East Africa’s biggest economy.
Covid-19 has slashed demand for Kenyan agricultural exports, decimated tourism and is expected to squeeze remittance inflows. In a scenario where economic activity is disrupted for two months and investor confidence restored quickly, the World Bank sees growth at 1.5% this year, according to a report released Wednesday.
Equity investors price in the future earnings to buy a stock. What’s up on the earnings front this year after belying expectations year after year. For investors who invest in more than the 50 stocks that trade on securities exchange, these earnings and index levels don’t mean much. Indices capture the state of the market – or so is the belief. The reality is different. Indices reflect the flavor of the season and are skewed towards the successful, hence deceptive.
Few would disagree that post-Covid-19 world would be different.
As companies cut costs and change their functioning, thousands of jobs would be lost. Incomes would vanish. Consumer and producer behavior would be transformed, but as Fed Chair Jerome Powell put it, ”The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II’
Economy would recover and Indices would rally one day, but what you bought in the dip, even index constituents, need not necessarily be lifted by the next tide, so what’s going to be in it for you?