A
few years ago I was looking through the Daily Nation and saw the full
spread Kenya Airways advertisement about their Initial Public Offering
(IPO).
I
was still pretty young by then but having endured Business Education in
a school that took KCPE pretty seriously, I thought even then that this was a
great investment opportunity. (I kid you not).
I put the idea to my
mother but she laughed me off. A single parent in a developing country,
why on earth would she even go and take such a risk? Needless to say, a few
years later when there was a run on the KQ stock and the share price
hit Ksh. 99, I was not only vindicated but quite smug about it. My
mother still will not invest in the stock market but the idea has been
running around my head for the past few years. There are stories of
people who bought their first shares at 18 and left graduate school
with tens of thousands of dollars/pounds. And debt free at that. There
are also stories of people who invested in the tech bubble and retired
at the age of 30 - (read the story of Rachel a young British
Entrepreneur).
I myself have never invested in the stock market. Although I've perused
a few prospectuses in my time, the fear that another ICDC is lurking is
enough to put me off (I encouraged my mother to buy, only to hear
Uchumi collapse a few years later. Thank goodness she didn't listen to
me then either!). However, recently, I've found myself wondering if
Safaricom is just the stock to get me off my lazy bum.
Information
on this IPO is difficult to come by if you're not in Kenya, but it's
not impossible. Looking through the financial reports on the company
website, in the last 4 years, they've made a healthy profit. They have paid dividends to all their
shareholders in the last 3 years as well, which means that if things
stay on course you will definitely be taking some money home at the end
of the year. Although Celtel has given them more than enough
competition, Safaricom is today, by market share, subscription base and
many other measures the largest mobile provider in Kenya, encroaching
upon Celtel's dominance in regional telephony. On a more general note,
Xan Rice reported in 2006 for the Guardian that the Kenyan Stock
Exchange (NSE) was one of the most profitable in the world, gaining
787% in value over the last 5 years.
So
why not invest? Maybe it's just the coward in me, but something tells
me that when something is too good to be true, it usually isn't. More
likely than not, my fears are unfounded, but I'll share them with you
anyway. Firstly, given the hostile investment climate around the world
I worry that the downturn will eventually strike Kenya. The USA is one
of Kenya's biggest trading partners (AGOA anyone?), and a slowdown in
trade in that country will eventually trickle down to us. On the other
hand, the Beast from the East (China) has shown itself more than
willing to pick up the economic slack, without the attendant questions
of democracy and governance that Uncle Sam insists on asking.
Allow me
to have a third hand and suggest however, that China's currency is
itself undervalued and its economy overheating according to most economic analysis
(See The Economist.com this week for an in depth analysis of China's
thirst for resources) and one lurking threat at the moment is that many
Olympians may boycott the event to protest high levels of pollution in
Beijing, forcing sponsors to withdraw from massive investments in that
country. Not to mention the current fiasco in Tibet.
Being
a Kencell and then Celtel lass myself, I have always had doubts about
the Safaricom business model. Bigger isn't always better, and although it's
great in general terms for mobile phone telephony to be so pervasive in
the country, one has to wonder when the market will say "Enough!" In
short, Safaricom seems to be making most of its money off an immense
volume of SIM cards at an unbearably low price. Although you could
argue that those SIM cards have to be used and thus there is money in
that, the 3 defunct SIM cards sitting in the bottom of my suitcase beg
to differ. Already in the UK the mobile phone companies have developed
a reliance on contracts to make money and Pay as You go (Kenya's
scratch card model) is confined to bottom of the line handsets and for
the use of broke international students like yours truly. If the
company cannot make profits, it cannot pay dividends; where does that
leave the investor?
More
specifically, I worry that the current investment climate in Kenya has
all the makings of a bubble - a self-perpetuating rise in share prices
of a particular industry. While Safaricom's shares aren't technically
on offer yet, the speculative frenzy with which Kenyans have attacked
the NSE over the last three years is, for me, cause for concern. Many
people aren't investing because they understand the logic and
procedures of being an investor but because their neighbour is doing
it, or their Aunt made a huge profit on the KQ run and now they want a
piece o the action. Research has proven that non-wealthy people, with a medium level
of education are more likely to invest if the people in their immediate
society do so (see Hong, Kubik and Stein call in their paper "Social
Interaction and Social Participation", 2004, Journal of Finance), and
certainly in Rice's article of 2006, many of the fruit sellers and
market workers were more than eager to compare notes with family
members and friends. This is all well and good when stocks are on the
up and up, but any economist will tell you, stock markets operate in
cycles of Booms and Busts; a bullish market (favourable to investment)
can't last forever.
However,
one of my personal mottos has always been if I fall; let it be from a
high place. Other than my nervous disposition there is no reason to
believe that Safaricom shares will be nothing more than another chapter
in the seemingly never ending success story of the NSE.
If Mobitelea
turns out not to be a front for dodgy government dealings and Kenyans
are actually given room to invest, my advice to other would be
investors is first and foremost, keep an eye on the stock brokers. In
the stock market, as in life, don't hand over your money to someone you
wouldn't introduce to your mother. It's cause for concern that the
Capital Markets Authority is having such a hard time regulating
brokerages but hopefully the government will hear the calls for greater
independence for the CMA. Keep your eye on the markets. If you can't
follow the ups and downs of your shares at least weekly don't bother.
Buy early and unless you plan on sticking it out for the long run, if
things start to go horribly wrong don't be a hero. Even with massive
infusions of government cash, if a stock is crashing dramatically,
there's a pretty good chance that the company is well on its way to
collapse. Sell, sell, sell! I found this very interesting article about an investment club in England - recommended reading for any
amateur out there. If you are a rank amateur like I am, the Financial
Times last year came out with a great book on "How to Use the Financial
Pages" available on Amazon, for about £10 (1,300 Ksh). Take my word for
it, it's a good investment, and may save you a great deal of pain.
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