Friday, July 20, 2007

EFFECT OF IPO’S AT THE NSE; NIL SUM?

I have been observing the NSE trend and especially in the run up to Kenya Re IPO, with a hawkish intent to pounce on counters encroaching to the red. I am have however reluctantly coming to the conclusion that the market might just shrug it off; like the IPO never happened. The IPO was announced in the last week of June in which, the NSE Index closed at 5146. In the last 3 weeks the Index has remained within the same range and has this week closed at 5137.

Within this time some of the counters which have shown signs of depression which can be explained away include,
• Equity; the negative allegations and credibility of its CEO made on the floor of parliament have caused it to fall from 146 to 133 within this time.
• BAT; this has dropped from 190 to 178 within this period. The profit warning the management issued to its share holders as well as the recent banning of smoking in major towns in the country could be the cause of this drop.
• HFCK; the interest this stock had generated on news of Equity buying major stakes in it seems to cooled down and has therefore oscillated between 35 and 39 in the same time span. The negatives on Equity could also have affected it.
Within the same period penny stocks which were expected to shed off as a result of investors dumping them in readiness to KenyaRe have defied all odds and have instead risen, include
• KCB
• Express
• Kengen
• Mumias
• CMC
We all know from the recent IPO’s since Kengen, that this IPO will be oversubscribed at a minimum of 300%. Why is it that this IPO is not affecting the bourse? Logically if investors were to sell to participate in the IPO, they should have done so in the preceding three weeks to the start of the IPO. Therefore I do not foresee a depression at the bourse whose cause can be attributed to the KenyaRe IPO. So how can we then explain the obvious over subscription which will occur?
• Have the Kenyan investors become so liquid that they will participate in the IPO’s without necessarily dumping some of what they already have?
• Are there so many investors entering into the game such that the net sum effect is nil?
• Could it be due to intense participation from the Diaspora.
If this IPO is not causing any ripple at the NSE, are we saying that even the Safaricom one will not have any effect?

These issues shall need serious consideration if proper investment strategies are to be formulated.

Jimmy