THE STOCK EXCHANGE, IS IT TIME TO PANIC?

Warren Buffet, according to the Forbes list, is the richest man in the world. He has an estimated wealth of about $62b or more than the size of the East African economy.

He has made his money by first investing on the stock exchange and later own buying whole companies. The 77 year old billionaire made his first stock purchase when he was 13.

Buffet’s success has come from buying good companies selling at a discount. When the market is generally overvalued he has the discipline to refrain from buying because everyone is buying.

In the run up to the current financial crisis Buffet has been out of the markets accumulating up to $40b in cash in the process.

Since the crisis begun last year Buffet has been in the market, his latest deals have been multi-billion dollar share purchases in investment bankers Goldman Sachs and US conglomerate GE. Share purchases in good companies heavily discounted by the investing masses.

Buffet is famously quoted as saying, “We are fearful when others a greedy and greedy when others a fearful.”

There is world wide panic on exchanges in the US, Europe and Asia and one can expect that Buffet is rubbing his palms with glee as he seeks to make his move.

Nearer to home trading was suspended on the Nairobi Stock Exchange on Wednesday to forestall a price collapse.

The Kenyan rout on Wednesday was triggered by news that the UK government was looking to support several banks of which Barclays and Standard Chartered were named. Both bank’s Kenyan units are listed on the Nairobi bourse and were the greatest losers on Wednesday.

However it should be noted that the Nairobi exchange has been on downward spiral for much of this year and the global crisis is just helping to accentuate the trend.

On the Uganda Securities Exchange there has not been a panic but a downward trend has been confirmed on four of the six local counters.

But on closer scrutiny one notices that there is a drying up of demand for Stanbic shares, the most active counter, and this lower demand has been seen across all the counters. What this suggests is that institutional investors, who do transact in tens of thousands of shares at a go, are seating on the sidelines and have ceded ground to the retail investors.

Institutional investors – insurance companies and pension funds, invest a lot in researching markets and because of the volumes in which they deal, a shilling movement one way or another has multimillion shilling effect on their portfolios.

Share traders many times take their cue from institutional investors to determine whether a share price trend can be sustained or not.

The fact that the current downward trend is being driven by small investors suggests that the trend is not sustainable. So why would the institutional investors allow this trend to go largely unabated?

There is no doubt that investors have one eye with what’s happening on the global markets. Institutional investors out of Europe or the US, who invest in Africa want to see how affected the continent’s markets will be affected before they commit more resources.

Secondly, the companies on the USE are largely unaffected by the global meltdown, all of them having reported strong growth in their last reporting period. What this means is that whereas the quality of the companies has remained largely unchanged the share price is falling, presenting increasingly discounted shares.

It is the same as going to market to buy meat which is fresh and wholesome but selling at sh500 because there has been a panic from the buying public because cows in southern Africa has been found to have mad cow disease.

As illogical as that sounds the market behaves rationally every so often, undervaluing or overvaluing shares according to public whims.

This might explain the other reason institutional investors are staying out. They know the companies are fundamentally sound and are content to let the prices slide further so they can snap them up at heavily discounted prices.

That is how money is made on the stock exchange. The question then is on which side are you, on the side of the panicking retailers or on the side of the savvy institutional investors?

Published October 2008, New Vision