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East African Business Week (Kampala)

East Africa: In Light of the World Financial Crisis, is This a Good Time to Buy Shares?

Emin Pasha

15 November 2008

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opinion

Beginning this week, East African Business Week will publish regular articles on capital markets and stock exchanges in East Africa. The author, Emin Pasha, says, "In financial reporting in our region, there is a clear gap between the journalists who write about finance (often wrongly) and the financial guys who write technically correct but frankly unreadable articles that are well over the heads of the investing public.

A middle ground is needed: financial articles that are not too technical but at the same time not too fluffy. Therefore, I present to you the seminal installment of "A day in the life of an East African stockbroker". This column will cover our region's financial markets through the very narrow lens of one individual's perspective. Whether you are a seasoned day-trader, a first time investor, or somewhere in between, I hope to shed some light on the current and crucial issues and events that are shaping our industry.

In light of the world financial crisis, is this a good time to buy shares? I hear this question a dozen times a week. My answer is always the same: "As long as you are willing to risk your investment capital, it's always a good time to buy".

This may sound simplistic but you can't make gains in the stock market without jumping in. I tell my clients, "if you are unable to tolerate losing a portion of you savings, or even all of it, the stock market is not for you, period."

For first-time investors the current depressed prices on the NSE, DSE, and USE make this a good opportunity to get into the market. The same is true for investors who already own shares.

Though many clients complain of their recent portfolio losses, I remind them that these are not "real" losses (or gains!) until you decide to sell.

Lower prices are a chance to add to a portfolio at a reduced price per share, a strategy known as cost averaging. So in the roughest of terms if you bought a share at say, 100 shillings and it is now 50 shillings, you can buy a second share at 50, bringing your average cost per share to 75 shillings.

Of course this averaging leaves out the time value of money as well as the opportunity cost of diverting the funds for more profitable uses.

The real key to investing in a down market is to review the 3, 6, and 12 month share price trend for a particular company.

Ask yourself, "is the share price at a 52 week low? Has the price remained stable but only gone down this quarter?" If one or both answers are yes, you should consider investing.

At the same time, do your homework and study the companies before you buy. Pay close attention to announcements of financial results and news related to your target company's sector.

In addition to conducting your own research, any stockbroker worth his license should be able to help.

Many brokers develop profiles for companies as well as weekly market reports and websites that contain a great deal of free information.

The worldwide financial crisis will impact on businesses that are linked to international markets. Tourism and exporters are two particularly vulnerable sectors. East Africa's advantage is that many of our listed companies mainly produce and serve their own domestic markets.

Companies whose products or services are linked to the wider financial world require close scrutiny before investing.

I will close with a story I heard recently from a fellow stockbroker. He told me that he has had more international fund managers contact him in the past two months than in the previous 12. These FMs are reviewing their risk models and now see investments in African markets as advantageous because we are "de-linked" from the cascading crisis.

I couldn't agree more.

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