Global Uncertainty Could Generate Superior Returns for Risk-Tolerant Investment Strategies

Heightened volatility and risk aversion by investors has resulted in a significant dislocation between equity market performance and underlying economic fundamentals across the globe

This, in turn, has created opportunities for risk-tolerant investment strategies that may exploit market disequilibrium, says ICEA LION Asset Management on their 2018 Half-time Investor Pulse.

Speaking at the Press Briefing, Judd Murigi, Head of Research said that during the first half of 2018, investor risk aversion gave rise to much more volatility than in 2017, resulting in the greatest divergence in global equity markets in at least six years, with developed markets especially the US significantly outperforming emerging and frontier markets.

As a result of the prevailing sentiment, developed markets may experience near-term inflows from risk-averse investors focused on capital preservation in the near term.

“Emerging and frontier markets may continue to experience near-term outflows to the extent that uncertainty persists, but investors with a higher risk tolerance and a medium-term investment horizon may choose to take advantage of the attractive valuations and solid fundamentals in some emerging and frontier markets to take positions with a view to generating superior returns when the market recovers,” noted Judd Murigi.

The Investment Management Firm reported that in Africa (excluding South Africa), the major equity markets exhibited varying investor sentiment, but overall, the selloff in emerging and frontier markets has reversed the strong start witnessed in African equity markets at the beginning of the year.

As a result, the main African equity markets are trading at lower valuations than at the beginning of the year, making them potentially more attractive to investors, although actual inflows will depend on investor risk appetite.

Judd further added that the market performance for the remainder of the year would, however, be impacted by regulatory developments in Kenya and Tanzania specifically.

The Nairobi Securities Exchange was the fourth most liquid market in the first six months of 2018, averaging a weekly turnover of USD 40m. Overall equity value traded is triple than that of the first half of 2017 while foreign investor trading is 20 times higher than as at June 2017.

Tanzania may continue to face near-term volatility due to challenges facing the banking sector and hence was suitable for investment strategies with a higher risk tolerance and long-term investment horizon, while the situation in Kenya would suit investment strategies targeting moderate returns over a medium-term horizon.