Bear market or just a correction?

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Kudzanai Sharara Taking Stock
The Zimbabwe Stock Exchange is experiencing its worst start to the year since dollarisation, and this we have written about before. Since the beginning of the year up to Tuesday this week, the ZSE All Share Index had lost 13,3 percent, dragged mainly by industrial stocks whose Index had lost 12,83 percent and of course mining stocks, which carried the biggest loser tag after dropping 15,34 percent year-to-date.

These losses on the ZSE could be seen as an unwelcome development especially by investors who bought at the market’s all time high of 532,17 attained on the 13th of November 2017. But for some, the market’s downward trend has provided investors with tradeable opportunities ready to be capitalised on — the high turnover currently being witnessed on the ZSE provides testimony that some investors are indeed seeing opportunities where others are bailing out.

There is, however, debate as to whether what we are witnessing on the ZSE is still a market correction or a bear market.

According to market vocabulary, the local indices long reached correction territory — having come off by more than 10 percent since the highs attained in November 2017.

Discounting last year’s losses, the market has already dropped by more than 12 percent suggesting that it’s now well in correction territory and should be bouncing. But the high price earnings ratios for most trading counters still point to a market that still has to go downhill in search for its true value.

Those who see this as a correction believe the market is still overvalued from the levels reached in the incredible bull run we saw from the third quarter into the fourth quarter of last year. Going forward, there is belief that the weakness we are seeing will subside when the market reaches its true level and that the stock market will start marching higher again based on company fundamentals.

With such sentiments, bargain hunters are already scouring the market for beaten-down shares as evidenced by the more than $80 million that was invested in the market in February — the highest February turnover since dollarisation.

Fortunately, the ZSE has an abundance of “oversold” companies, including some making up the ZSE Top 10 Index, which has lost 14,69 percent year-to-date.

Within ZSE Top 10 Index, most of the companies are strong brands with sustainable business models. Some of these stocks have, however, come off quite significantly with BAT Zimbabwe having lost 44 percent year-to-date.

Econet has also been hard hit with a 26,2 percent loss, but the telecoms counter continues to display its quality after paying a third quarter dividend last week, taking the FY2018 dividend payout to $50 million.

Most of the constituents’ counters, with the exception of Delta, Innscor, Seed Co and Old Mutual have recorded double digit losses and investors are likely to be keeping an eye.
Banking group CBZ is standing out away from other banks with a year-to-date loss of 31,4 percent to 10,29 cents. A closer analysis is warranted to determine why the market has been so unkind to it when most other listed financials are, with the exception of Barclays down 15,8 percent, holding forth.

Mid-tier stocks also provide ample choice for bargain hunters, with Art Corporation, which last week gave an upbeat trading update having lost 35,5 percent year to date. Its price earnings ratio at 7,76 times is also undemanding. NicozDiamond, now largely owned by NSSA/First Mutual Life, but down — 21,9 is also a compelling case. The company’s shares are now very illiquid and demand might easily push the share price up. There is however risks as the counter is a likely candidate for de-listing.

Property stocks are probably not the best bet at the moment, but might provide punters with a speculative buy. With high expectations of an economic turnaround, demand for property might turn for the better and property stocks, Mash down 19,4 percent, ZPI 20,8 percent, First Mutual Property 18,4 percent could be worth a look.

Bear market
Those in the bear market camp expect the downtrend to continue, with the potential for indices to fall beyond 20 percent and further down. These investors believe by selling now, they are protecting themselves from further losses. But the challenge they face is that there are limited options for portfolio diversification. Interest rates for fixed term investments are at their lowest, a situation worsened by rising inflation.

The stock market will not subside for longer as long as interest rates are this low while inflation is rising. Investors would eventually look for some hedging and stocks, given their liquidity, will provide insurance and pension funds a home.

Further with currency challenges far from being solved and bank liquidity positions at all-time high, investors will soon flock to the stock market, giving credence to those who say the market is self-correcting and will start rising again — soon.

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