This week in spite of the fact that we saw an initial appreciation of prices on global stock markets after the announcement that President-Elect Barack Obama had won the US elections we eventually saw a decline in prices on the same stock markets. Testimony to the fact that the global financial and credit crisis doesn’t seem to be going away any time soon.
 US President-Elect Barack Obama |
Anxiety currently prevails on these international stock markets regarding Mr Obama’s position as far as the $700 billion bail-out strategy proposed by the current US government is concerned.
Mr Obama is on record as being of the opinion that such a bail-out strategy is not in order and that it is simply a mechanism through which tax payers money is used to finance corporate greed at Wall Street where the New York Stock Exchange is located.
However, the reality is that at the bear minimum this bail-out strategy has prevented the possible total collapse of the US economy in spite of the fact that the signs are apparent that the same economy is moving into recession.
The repercussions of such a collapse would have resonated right across the globe, with economies that are heavily linked to the US also exhibiting similar distress.
It is for this reason that global financial industry players are keen to obtain an understanding as to what President-Elect Obama’s strategy is for the US economy and especially who he is going to appoint as Secretary to Treasury. In Uganda the equivalent of this office is actually the Minister of Finance.
Therefore global stock market volatility as evidenced this week is likely to continue as these worldwide markets await Mr Obama’s pronouncement as to the way forward for the US economy. He has up to January 2009, when his swearing-in is due to pronounce himself on this matter. It will be interesting to see just how long he is willing to wait before taking a position. The world is watching him.
On the flip side, much as such volatility spells doom for a number of investors, the reality is that volatility is a money-making opportunity for cash flash investors. This occurs because the cycles of panic and optimism exhibited at various stock exchanges many times do not have rationality attached to them. It is for this reason that risk-takers who have cash take full advantage.
If one looks at the Safaricom share on the Nairobi Stock Exchange as an example, one would need to understand just why we have seen such a substantial price volatility following the IPO which was executed at Five Kenya Shillings (KShs5). Initially, the price of the share rose to Shs7.80 before it declined to as low as KShs3.10.
This occurred just as the global financial crisis was beginning to show its face and when international investors had to quickly retreat to their safe havens abroad as the global crisis began to bite. Kenya was perceived to be a risky destination for their investments given that it is a developing economy.
We therefore saw massive offloading of the Safaricom share by foreign investors taking their money back home. This massive offloading of shares led to excess supply of shares and with excess supply of shares a price decline occurred, especially because there wasn’t an equivalent demand to meet the said supply.
Then there were the local investors who had borrowed heavily to purchase their Safaricom shares, which they staked as security/collateral.
These found themselves exposed because following the said price decline their lenders/ bankers were calling these local investors asking them to top-up their securities which were now undervalued against the amounts of cash they had borrowed. Many found that the easier solution was to sell their shares. This also led to further increased supply of the share on the market and a steeper price decline.
The opportunity for the cash flash risk-taker therefore comes in the said price decline. When the price drops to KShs3.10 they buy because in all likelihood it will rise again over the long term just as it did in the past. When they are satisfied with their predicted price rise they subsequently sale their shares.
The reality therefore becomes that they benefit from stock market volatility because the next conquest could well be the same stock that they had previously bought and sold. It may present a similar opportunity with different timing.
Therefore much as the world markets are waiting for Mr Obama to pronounce himself as to the way forward with the US economy which heavily links into the global economy there are aggressive risk-takers who are out there making money from the volatile world markets as they buy and sell shares using their cash flash positions.
The reality is that across the globe, the prices of a number of stocks have fallen so much thereby presenting such cheap values that are hard to resist.
The only option is for them to simply buy and hold these shares until the opportune time comes to sell. That opportune time to sell in all likelihood comes sooner rather than later for many when the markets are volatile.
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