Irrational Exuberance in Kenya
Those of you who subscribe to the newsletter are already aware of my belief that the Nairobi Stock Exchange has gotten ahead of itself. Today's trading activity is a prime example of why I feel this way.
Barclay's Bank Kenya shares closed up nearly 25% today after trading 45% higher at one point.
For what reason?
Well, it had very little to do with fundamentals. Sure, the bank's 3rd quarter earnings report was solid (EPS growth of 44%, and an expansion announcement). But most of the profit growth was due to reductions in the loan provision and improved cost management. Interest income grew at a much more sober 12%.
No, Barclay's stock surged largely because of a 5:1 share split and 1:3 bonus share issue. This means that 300 shares of the company will soon become 2000.
Does that make Barclay's 25% more valuable than it was yesterday? Of course not. But many traders on StocksKenya discussion board are considering adding to their positions.
Buying more of a bank stock that now trades at more than 26 times trailing earnings and 8x net asset value does not appear to be a bargain to me. But they may be rewarded for their optimism. Recent IPO oversubscriptions on the market have demonstrated the booming popularity of the equities market. A lower post-split share price could entice even more optimistic (or ill-informed) investors to join the party.
5 comments:
I agree with fweza. The NSE has its own unique way of movement that is outside fundamental process. One reason is that a split in people's eyes is seen as positive because the market has been on a bull run for quite a while so expectation is immediate gain.
I recently came across a newspaper article stating that Zimbabwe stock exchange is registering highest returns. What's your take on it?
Fwez & Mwas - Thanks for your comments. The difficult thing about momentum investing is that one is never quite sure how long it is safe to ride the wave. In the short term, price manipulation can make valuations appear rather arbitrary, but over the long term (5+ years) fundamentals are what ultimately determine price movement.
I hope prices on the NSE merely plateau until fundamentals catch up. It would be a shame to see people lose a lot of money in a crash.
Mwas- That's a great idea for another post. I'll try to type up some thoughts on the ZSE before too long.
Best wishes to both of you!
8:12 PM
Its easy to put money INTO Zimbabwe but tough to take it out thus there is a paradox...
The only investment that can outstrip inflation is either land or shares.
Buying land in Zimbabwe is fraught with risks thus the only liquid investment is in shares!
CT: I thought with the world record spiralling inflation, the economy would be in bad shape and all the counters would be in the red?
@Mwasjd: Not exactly,as inflation rises firms increase the selling price of goods/services so the earnings of the firm keep track of inflation.
At the same time assets of the firm also increase in value.
Hence,in a country with high inflation stocks generally rise.
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