COMMENT: Shares are sold in bull runs

22 Sep, 2017 - 00:09 0 Views
COMMENT: Shares are sold in bull runs

eBusiness Weekly

The recent dramatic bull run on the Zimbabwe Stock Exchange, has many sources, but sheer greed and a probable misunderstanding of just what a share market actually is, are among them.

Those climbing in and buying shares say that they are trying to protect the value of their money and that in any case “everyone is doing it”. But many may forget, or ignore, the fact that for everyone buying a share there has to be someone selling that share. So for everyone climbing into the stock market there has to be someone climbing out and converting shares to cash. So it is wrong to say that “everyone” is going into shares. Exactly half those involved have to be selling.

This is because generally the number of shares is fixed, at least for all practical purposes. There is an occasional initial public offering, when a new company goes public, and there is the odd rights issue, when an existing listed company wants to raise more capital, giving existing shareholders the first option as the law requires. And we have seen the odd debt for equity swop, which increases the number of shares. Share buybacks, when a company buys its own shares and takes them out of the market, can reduce the pool. But the ZSE is a fairly large and diversified market by African standards and the size of the share pool cannot change substantially overnight or even over a couple of years.

So a stock market is different from other markets. Take the example of Delta, one of Zimbabwe’s best managed companies that beat off imports through smart investment, upgrading, pricing and marketing long before SI64 and forex shortages. If demand for beer rises Delta brews some more to meet demand and if it thinks demand is going to keep rising it plans investments in capital equipment to ensure that there are no production bottlenecks while squeezing more productivity out of other assets. But if the Delta share price rockets Delta does not issue more shares. It long ago raised capital by issuing shares and now, with the approval of its shareholders, retains a decent percentage of its profits to fund new or replacement capital assets.

Part of the bull run was justified by fundamentals. Generally many shares were underpriced. Very mild deflation for most of the time since 2008 coupled with very high interest rates for those with money meant money markets were far more interesting that share ownership. At the same time the bad times of hyperinflation and economic decline followed by a total opening of the Zimbabwean economy forced every surviving company to rebuild and rethink.

Innovation, riding faster technology changes, and introducing new products are more important than ever, but tend these days to be backed by fairly detailed and prudent projections of costs, investment and revenues. The CEOs and senior managers who either resisted change or thought flash would overcome substance have largely gone to be replaced by women and men who have been chosen out of a far larger pool of educated and experienced Zimbabweans and have a far tighter grip on management fundamentals.

At the same time the Government, and market forces, have done more to back local industry, have done more to boost the incomes of the rural Zimbabweans. So there are more opportunities for many ZSE companies.

To take a very simple example, again from Delta. A prudent investor might well calculate that the rising rural incomes from a decent season backed by Command Agriculture will see some of that extra income go on what statisticians call beverages, and that Delta will meet that demand and so raise extra revenue by better productivity rather than a pro-rata increase in investment. It is an interesting question, of course, how much the extra will be, but that is what makes playing the ZSE more fun than giving a few thousand to a bank to lend to someone else.

And yes, rising inflation expectations and probable falling real interest rates make investment into real assets, like shares in factories, far more attractive. Past disasters can affect choices and put a premium on stability.

But that said there have been very clear signs that some who raced off to a stockbroker have been more interested in buying a block of shares on Monday for $1000 and selling it on Friday for $2000. And so long as the bulls were racing ahead so fast that was a temptation. But as prices overtook every fundamental there was always going to be a time when the run would hit a brick wall. This appears to have happened and now the question is whether the landing will end in tears.

The market will obviously stabilise at a higher level than before the run, but just how high? And those still thinking about putting money into shares should take time to think about just who is selling shares and taking their money, and why they want to sell. Some have been sitting on shares they bought for $1000 years ago and now finally get their money back with a bit extra; some bought at the start of the bull run and are now smiling all the way to the bank; and some regrettably thought they could get rich quick by running with the herd and are now having to bail out with what they can salvage.

Running in a stampede with bulls or bears can be exhilarating but the real winners in share buying and selling are those who look beyond the prices today and next week and have good ideas of the price next year at least, in case the herds change direction.

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