eBusiness Weekly
The bubble has burst as good news floods markets and tears have started dripping down the cheeks of a fair number of people who instead of doubling their money in three months have seen it almost halve in a few days.
The Zimbabwe Stock Exchange saw its latest bubble as the industrial index rose five-fold to peak at around 534 driven by openly expressed fears that this was the only way to save something from a wreck of potential hyperinflation and also driven by unvoiced sheer greed of those who thought they could ride the tiger of a bubble.
The prices by early November could only have been justified if the Zimbabwean economy had grown three-fold to five fold over the past year, depending on how undervalued a prudent investor might have felt equities had been undervalued when banks were offering very high deposit rates.
And fairly obviously growth rates were only a small fraction of this.
In most markets buyers of equities for long-term investment think about the actual value of the company they are buying a share in. So they do careful research and calculations looking at the value of assets, the value of goodwill, the efficiency of the management and whether that is improving or declining, and the long-term growth prospects.
So if that analysis suggests a prudent takeover master would buy the firm for $200 million and there are 200 million shares, then somewhere round $1 is the real share value. Then this same investor, rather than market player, would look at other factors, such as variable inflation rates, and perhaps finally fix a value of $1,10. So if they were still interested they could instruct their stock broker to buy anything on offer below that price. They certainly would not be paying $5 because they thought the bubble would last forever.
It seems reasonable to assume that those who bought into the ZSE early in the bull run were prudent.
There was general agreement that equities were undervalued and so a good longish-term investment. Fears of climbing inflation, caused by a negative balance of payments, would have allowed a premium to those not really into shares and wanting to balance their assets.
These investors, even if they could not unload their holdings near the peak of the market, will still largely be gainers. They bought on fundamentals. And some of them who did unload before the bubble burst will have a serious capital gain.
But then, as with all bubbles, there were those driven by wild rumours on social media, their own greed and a herd instinct climbed aboard, reckoning they could clean up.
And that herd instinct sent prices soaring way above the true values of the shares. Ignoring warnings.
But we must also remember that with $10 million of shares being sold in a day, there were holders of $10 million worth of shares who reckoned they had found a right moron ready to buy at a grossly inflated price.
Then came the good news. Action by the defence forces, the people and Zanu-PF suggested that Zimbabwe could rather quickly have a stable Government ready to start fixing fundamentals and obtaining some assistance as it moved out of a fairy-tale into the real world.
Fears of hyperinflation recede, sensible people suddenly work out that banks are going to need more deposits to lend on to businesses actually growing, and the first percentage points are knocked off the share prices.
Then comes the second panic. The tiger riders want to lock in their gains and start selling, but few now want to buy, since the prudent reckon prices are still several times the real value and other tiger riders know that buying into a bear market is a fools game until prices have fallen to something close to reality.
It appears counter-intuitive to see plunging prices from good news and rising prices from bad news, but that applies when equities are so grossly overvalued that good news exposes the bubble.
If the index had been something around 150 and lost 40 percent in a week then that would have indicated serious pessimism.
But falling from its ludicrous high simply implies good sense and optimism. One problem of bursting bubbles is that prices can fall below real value, especially when people have borrowed money to buy the asset in the bubble.
We hope this is not a significant problem in Zimbabwe as the bears growl around the ZSE.
Interestingly falling share prices are not the only things falling on the arrival of perceived good news.
The premium for US dollar bank notes or other free funds has almost halved as well. Good news can be as infectious as bad news.
