When it comes to the stock market, people tend to have very different opinions on when to buy. In our day-to-day lives, people tend to make purchases when there’s a sale i.e. when prices are lower. In the stock market, however, people tend to do the opposite.
People are not comfortable buying when the market is low or underperforming. They think the market will continue to underperform and that they should buy when the market is performing well.
One thing needs to be set straight: it’s impossible to predict the peak or the bottom of the market. That isn’t to say that there aren’t any indicators that show when we’re nearing a bottom or nearing a peak. These indicators are not an exact science. They are a probability. When these indicators show that we’re nearing a bottom, there is a possibility to make losses but there is a bigger possibility to make gains.
Indicators show we are very close to a bottom
The first indicator that we are nearing a bottom is when foreign investors exit the market. Over the past few months, short-term foreign investors have opted to exit emerging markets due to poor market conditions. This shows that large sums of investments have already exited and not many more investors will leave the market.
The second indicator is the significant increase in the number of acquisitions, showing that investors are valuing companies at prices higher than their current market value.
The third major indicator is that the US market is approaching a bottom. The biggest indicator of this is the S&P 500’s significant jump right after the Federal Reserve increases interest rates in July. The rapid increase in interest rates in the short term shows the government is trying to reduce liquidity, but also shows that the peak will come quickly.
The fourth indicator is that liquidity in the market decreased. The liquidity decreased due to poor market conditions, so investors do not want to buy or sell anything and are holding on to whatever they have.
A bonus indicator is that the upcoming IMF deal will take place this year. It is set to be completed as soon as possible, & so a significant cash injection is expected.
How to pick stocks
An investor should look at high-quality stocks to buy in market conditions like this.
What is meant by high-quality stocks? Investors should look at companies that show solid financials over the past 2-3 years and are currently trading at a lower price than their value.
These companies have every reason to recover and should begin to see gains when the market rises. Don’t invest in stocks that made a one-off profit because they hold a high level of risk. Looking at stocks that foreigners invest in is a good indicator of what stocks to buy. Invest in second-tier stocks once the market settles and begins to recover.
The market is more rational than you think
The valuations penalize companies for very specific reasons and favor companies for other specific reasons.
Non-banking financial services companies are trading at 30x-40x earnings (Fawry, E-Finance).
The lowest valuations in the market, regardless of large profits, are in the commodities market. The valuations of these companies now price them assuming commodity prices will drop. Sidi Kerir Petrochemicals, AMOC, and Abu Qir are all being traded at low prices even though they reported huge earnings.
Another industry that has low valuations are companies that rely on construction and are project-based. Any company that does not have a guaranteed continuous cash flow is valued very low as well. Companies like Orascom Construction and El Sewedy Electric depend on individual projects and hence do not have a guaranteed continuous cash flow.
Lower valuations are applied to these companies as their future is not clear-cut. In the future, the state of the economy will be more stable so it will reduce the risk factor for these companies and increase their valuation.
More stable companies are companies in the food industry. They have continuous cash flow regardless of any economic factors. Purchasing stocks in the food industry can be considered a low-risk investment. The expected returns are moderate and they are neither overpriced or underpriced.
Do not invest heavily in growth industries such as non-banking financial services as they are already well valued.