Tuesday, December 9, 2008



December 8 2008

In common wisdom, it is well understood that besides pyramid schemes, few investments lose you 88 per cent of your savings in two years.

But as the stock market reels under the global financial crisis and lack of investor confidence, a group of investors are feeling most of the heat with their stocks plunging below issue prices.

Never mind the fact that some of the victim companies surpass their industry average performance and experts forecasting a bright outlook.

Overall, all investors at the Nairobi Stock Exchange have lost considerably if the market performance gauge —the NSE 20-Share Index— and market capitalisation are anything to go by.

In slightly over a year, the index has slid from a high of 6161 points recorded in February 2007 to last Friday’s 3160 points.

From the highs of last year, they have lost Sh54 billion to the bear as market value fell drastically to Sh746 billion at the close of trading Friday.

Safaricom, Mumias Sugar Company, Sameer Africa and Eveready are heavy loser, having shed Sh77.4 billion in value on the initial public offering.

But generally according to the head of investment at Zimele Asset Management Ltd, Isaac Njuguna, the share prices are falling because the stock market is in a bear phase.

“Share prices do not reflect the fundamentals of underlying companies during a bear market because of low investor confidence and general pessimism,” says Mr Njuguna.

Huge supply

“Fundamentals for most of the listed companies are still strong,” concurs Job Kihumba, the executive director in charge of corporate finance and research at the Standard Investment Bank.

This holds true in the case of Safaricom. Although the mobile service provider remains fundamentally strong, its shares have slid below the Sh5 offer price since they debuted at the NSE on June 9 this year, for instance, closing at Sh3.30 last Friday.

Currently ranking as the most profitable listed company in eastern Africa, Safaricom’s main undoing has been the huge supply of the 40 billion listed shares into a market that previously had a mere 15 billion shares.

With a majority of retail investors having funded their participation in the offering using loans, many of them have been liquidating the stock to settle the loans and this has further depressed its price.

The global financial crisis has exacerbated the situation as foreign investors, who were expected to cushion the stock against any panic sale, have joined the retail investors in offloading the stock to consolidate their investments.

“Based on current supply, seven out of every ten shares at the NSE are Safaricom shares and any rise in its share price is often followed by a massive oversupply thereby affecting the price,” says Polycarp Ngoje, the head of research at Tsavo Securities.

The company, which saw its pre-tax profit rise to Sh8.9 billion for the six months ending September 30 this year, up from Sh8.7 billion recorded over similar period in 2007, is strong since it controls about 80 per cent of the market and is operating in a growing industry—Information and Communication Technology.

Negative sentiment