Tuesday, April 22, 2008

Safaricom IPO and NSE phenomena

Gold rush: Kenya doesn't have gold, diamonds et al and the only oil will get will probably be expensively mined. But thank God for the NSE. If you invested Ksh200k in 2002, you have a 30-50% chance of having seen that Ksh200k turn into almost Ksh2m. As with any gold-rush, the pioneers probably staked the richest ores. All is not lost and those looking for opportunities should throw in some serious amounts, because like it or not, Kenya’s great times are ahead of us.
Margin-trading: The new trend in town is of course to take a loan and use it to invest in an IPO. The game being one of margins. For Safaricom, guys are probably thinking that if say they get a loan charging 15% APR, they’ll then only need for Safaricom to get to Ksh5.40 or higher for them to be in the money. That is because they’ll hope to cover the 5% interest charged for the 3 or so months they hold the loan plus the 2.1% commission charged when they exit the IPO position. Are there issues with margin trading of this kind? Yes, if Safaricom doesn’t get to 5.40, some guys will be looking for other sources of finance. Worst-case scenario is that a bank now becomes ones of the largest shareholders of Safaricom. When one considers the risks inherent in share-trading, lending is a dodo. Margin trading also makes share-trading a speculative activity which ion the real sense of the word it shouldn’t be.
High net-worthy and QIIs: Its impractical and a serious disincentive to expect somebody putting Ksh1m in an IPO to wait three months for a Ksh900k refund. That brokers have responded to this by offering QII status to their high-net worthy clients should be seen as good business. The socialist in us all would however not want to see some portions of society getting preferential treatment. So what should be done? How about, allowing high-net worthy (under a pre-agreed criteria) to participate as QIIs but enforce a lock-in for say a period of 12 months?


the kandyman said...

Margin Lending is an area that i believe should be left for exprienced investors, being in a country like australia has really shown me how these structured loans can bite and really bite hard. I would not wish it on anyone but a margin call is just about the worst thng you can get. believe me i thing nearly 40% of all high end execs have received more than 3 margin calls in the last 9 months. Aus Exchange has gone through a rough patch(so as every other market in the west, dure to the credit crunch) and the margin loas were only offered to high net worth individuals who are now struggling to keep their shares (because if you dont pay a margin call, then the bank sells the shares on your behalf, with/without your consent, worse still its so bad that you are supposed to respond to a margin call within 12noon of the morning it is issued, thats the ausi regulation). cars,boats, paintings are being sold in huge amounts becasue these investors are trying to weather the storm and keep their shares. now i really hope that the people taking up these loans understand the risks involved, especially in a highly volitile market.

MainaT said...

Kandyman-I'd hope that banks were using some form of low-level credit scoring (e.g. basing loan on earnings) so as to cover themselves. And the borrowers.