Strategies to prevent the creation of Investment bubbles

An investment bubble is a situation where the supply of investment cash outstrips the available investment opportunities. What happens, therefore, is the prices of the existing opportunities rise making them overpriced. An overpriced investment is an investment in which the current price does not reflect the expected reasonable return on the investment based on the financial information available of the particular investment.

Investment bubbles are very dangerous to the individual investor and an economy at large. Good examples include the current Sub prime crisis in the United States and the current Real estate pricing crisis in Kileleshwa and Kilimani areas of Nairobi. They lead to a mismatch of the supply and demand of the particular investment leading to huge losses as a price correction takes place. In some cases such a price correction can have a huge impact on the rest of the economy especially if fund depositories like banks and fund managers like pension schemes are involved. Normally the government is forced to pump in massive amounts of funds to prevent the collapse of such economies destabilizing other economic sectors- funds that would otherwise be used on development projects. It is therefore necessary for any government to prevent the creation of such bubbles

To prevent the creation of investment bubbles, I recommend that governments should only allow certain types of investors to participate in particular types of investments. Technical experts, ‘monied’ individuals and venture firms should only be allowed to invest in high risk investments, banks and fund managers in real estate and other medium risk investments like bonds and finally individual investors in stocks and treasury bills and other low risk investments.

The Kenya Investment Authority can be given more powers to regulate investments in this area so prevent swindlers from entering the market. The Kenyan stock Market faces the threat of being turned into a haven for charlatans through the creation of financial scams because after the Safaricom I.P.O, the supply of cash will outstrip the investment opportunities creating an investment bubble in the stock exchange. The Capital Markets Authority needs to act very fast together with the Kenya investment authority to regulate and create new investment opportunities respectively. The recent collapse of Nyaga Stokebrokers is a pointer to by hypothesis. Now stock brokers are appointing agents to act on their behalf and these agents are not subject to any regulatory authority. It is likely that these agents can get involved in unscrupulous business practices like converting themselves into pyramid schemes to steal money from the unsuspecting public. They can also withhold the payment of funds to the stock brokers leading to the collapse of the stock brokers themselves as was the case in insurance companies between the insurance brokers and the insurance firms.

The government should create new investment opportunities to prevent the creation of investment bubbles that will lead to massive losses. The Kenya Investment Authority has data on investment opportunities in every business sector and this might be the chance for it to change its focus from foreign investors to local investors. The government can also raise funds for its infrastructural and social projects. Another solution would be to attract local funds into off shore markets like china and Mauritius as a way to prevent inflation. Cash can be our next export earner by investing in other countries. It will initially make the Kenyan shilling weaker (making exporters happy) and later make the local currency much stronger when the returns on investment begin to return back home.

New share listings can also follow the Safaricom I.P.O so as to mop up the excess liquidity in the market to prevent inflation. Investors who will have made huge profits after the I.P.O can then be encouraged to diversify their investments through lower risk vehicles like fund managers thus increasing the amount of savings in the country. In so doing there will be less money in circulation for the use in direct investments.

Business consultants and financial Advisors can afterwards advertise themselves to help out investors manage their funds more prudently. Entrepreneurs can take advantage of the current situation to launch their new innovative ideas. The case of Sasanet was a very novice concept where a technological firm can raise money from the public to fund its innovation. What lacked is regulation of such ventures. To reduce the risk in emerging companies, the facility should only be open not to individual investors but to venture firms who will be able to gain control over the board of the company and offer technical expertise in the firms. This will raise funds for research work and new product development without involving the government, something seriously lacking in Kenya. Maybe new laws should be put in place to increase savings like the reintroduction of Capital gains tax or redirecting the funds to public projects. Tax exemptions can be given on capital gains that are spent on social projects.

Kenya is on the verge of attracting huge capital inflows through the Safaricom I.P.O and if these funds are not handled properly, it can make majority of Kenyans risk and investment adverse. This is the time for the government and other related bodies to develop policy frameworks and systems in which the sector can operate under. There have been calls for the establishment of a financial Regulatory body that will encompass all financial activities in Kenya and this might be the first step in creating a vibrant and world class emerging market that will help Kenya achieve its Millennium development goals and the vision 2030.