Wambui Mukundi and Rakeli Gichuki
The reasons for the rise and fall of share value of listed companies are complex. Stock prices are affected by a myriad of direct and indirect reasons depending on the industry and company in question. Whereas these factors cannot be traced in the financial statements, there effect is always reflected in the books. Companies in contemplation of these factors often conduct a PESTEL analysis to determine how such factors can be mitigated or used in their favour. Individuals intending to invest in the stock markets should also conduct the necessary research on external events affecting or likely to affect particular industry or listed company. Some of the identified external factors include:
National, Regional and International Events
Political events such local and regional wars cause
political instability and hinder investor confidence in the stock market thus
affecting the performance of specific stocks. For instance, listed companies
within the tourism industry suffer loss of revenue due to low sales during an
era of political instability. A study conducted to show market performance during
the general period indicated that performance of the markets is strongly linked
to political events and regime prevailing. The study showed a steady decline of
the market performance from 1997 to 2002 during the last five years of the KANU
Regime. The market thereafter improved steadily after the transition to the
coalition government in 2003. During the 2007, Post election violence there was
a considerable decrease in the market performance. The Reuter’s consumer and
retail news also reported that TPS Serena had to deal with a slump in Kenya’s
tourism market in the first half of 2013 in anticipation of election violence following
the events that transpired in 2007.
Sentiments
Investors rely not only on expert opinion but also on how
the public reacts to certain information relating to a listed company. This
hype maybe about the release of a new product into the market or a merger
amongst others reasons. It does not necessarily have to be based on truth but
investors are known to nonetheless base their investment decision on the same.
A classic Kenyan case would be the Initial Public Offering of the +Safaricom shares.
Members of the public heavily relied on the hype to purchase their shares with
the company. The shares significantly oversubscribed and demystified the myth
that only the wealthy can invest in the stock market. Whether the public was
right in purchasing these stocks only the future can tell and I am particularly
optimistic. Sometimes the masses are right and the stock is worth the hype
however for obvious reasons this is not always the right way to go about
investing. Besides, a lot of hype has been created around pyramid schemes that
have eventually collapsed.
Development
Developments surrounding certain Industries also have
effect on the price of certain securities. Such developments may be social,
legal or economic. For instance listed companies embracing technology and
moving along with the digital migration are likely to attract more investors as
opposed counterparts who do not. +Safaricom also takes lead on this. This is
because it shows that the company is striving for efficiency, which results to
increased profits.
Inflation
Other external influences include Inflation rates.
Investors opt to go for government bonds to take advantage of the high
interests as well as ensure protection of their investments. Foreign currency
rates also affect the stock market especially foreign companies listed in Kenya
and the reverse.
Conclusion
It is the duty of an investor to conduct relevant
research with external factors in mind before leaving it to chance. A good
method of doing this would be to conduct PESTEL analysis of their preferred
stock to determine the factors not foreseeable by merely reading the financial
reports of the company. While the above factors may affect the price of a
security, it should however be noted that not all developments surrounding a
particular industry or company is reflected on the price of the particular
security. The effect of both external and internal factors on the price is
dependent on how shareholders and potential investors react to the information
of the presence of such factors. Some investors react immediately, others
observe in order to note the difference in the value of security in question. Others
access the information after the effect.
--------------------------------------------------------------------
References
Agela Kithinji& Wilson
Ngugi . Stock Market performance before and after general elections-Acase study
of the Nairobi Stock Exchange. Retrieved from http://www.aibuma.org/archive/proceedings/downloads/Angela%20Kithinji,%20Kenya.pdf
A very nice post
ReplyDelete