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Safaricom’s Woes Don’t Mean the Stock Market is Broken

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A rather sombre tone in an article in the East African today, regarding the less-than-impressive performance of Safaricom shares since the company’s IPO last year.

While the share price has more than halved in value since flotation, this isn’t to say that it is not a true reflection of the company’s value. Remember, the IPO was massively oversubscribed, and the presence of foreign investors looking to make quick returns did skew the share’s performance somewhat. When a large amount of people are looking to offload their shares very shortly after buying them, there is always going to be downward pressure.

As I’ve said before, I consider Safaricom to be essentially sound, and a share I’d be happy to keep in my portfolio, throughout this downturn and beyond. I think what may have happened is that such a well-known company was always going to fall victim of what Alan Greenspan termed “irrational exuberance,” especially when those trying to register for shares heard how oversubscribed they were. However, now that the foreign investors have pulled their funds and economic reality has caught up with local investors, the shares are now more realistically prices. After all, the price of shares at flotation is often a guess; a very complicated guess, but a guess all the same.

Surveying the financial landscape, it’s obvious that some reforms will need to be made, in particular the oversight and scrutiny of investment banks and brokerage houses. The Nairobi Stock Exchange (NSE) is still too prone to chicanery to be left to self-policing or light-touch regulation. There will be those players who complain, but if the NSE is to maintain and build on investor confidence, it needs to be above suspicion. The proposed audit of the Safaricom IPO is one thing, but measures need to be put in place now so that when the economic recovery does begin, there is less scope for misleading or dishonest trading.

[Image by Netream]


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