eBusiness Weekly
Albert Norumedzo
In a desperate move to abate the uncertainty in liquid investments owing to the growing currency crisis, most investors have sought safe havens to preserve their wealth through investing in hard assets which are in less liquid form such as property, stocks and other hard investments. Many have sought refuge in stock market investments and this has subsequently seen the Zimbabwe Stock Exchange record unprecedented growth which defies the economic status quo.
The ZSE has witnessed unparalleled performance second to none across most financial markets, recording growth of 250 percent year on year and 141 percent year to date on the Industrials Index. The Minings Index has also seen phenomenal gains of 221 percent and 44 percent, year on year and year to date respectively.
As one of its characteristics, the stock market is an economic barometer which mirrors wider economic performance through the reflections of underlying listed assets. The economic principle behind this characteristic is that the listed companies, spread across their various sectors and industries are a representative sample of the wider economy landscape. Bad or good performance by underlying companies is a reflection of prevailing economic conditions, when the economy is booming, profits are high and business confidence is high, company earnings respond to this and drive the intrinsic value of listed companies, the opposite is true in the reverse of this situation.
If the barometric qualities of the stock market are anything to go by, one would be quick to assume that the Zimbabwean economy is on an aggressive upwards trajectory buoyed by growth across all sectors. Contrary to this assertion however – notwithstanding recovery of selected sectors like agriculture – the Zimbabwean economy defies the current financial market trend and is strikingly in a worrying opposing fashion.
An unabated local and foreign currency shortage has reigned supreme to the detriment of the economy bringing with it an uncontainable resurgence of a currency black market which threatens the fabric of the multicurrency regime adopted in 2009 as it pits bond notes and bank balances against hard currency.
During the six months to June 2017 investor confidence has been on the back foot as the currency crisis brings fears of a return of the dreaded Zimbabwe dollar which reigned havoc in the hyperinflationary era. The anxiety around the upcoming election has also contributed to investor apathy. According to the midterm monetary policy review statement, compared to the same period last year (January to June), foreign currency receipts from foreign investments decreased from $32.8 million to $6.8 million. This is testimony of the prevailing economic uncertainties.
Notwithstanding the efforts that Government is making to revive key sectors such as agriculture and manufacturing through various initiatives and partnerships the crippling foreign currency crisis and lamentable foreign investment has proved to be a vicious countering force pulling in the opposite direction.
The economy had been initially projected to grow by 1,7 percent before upbeat performance in the agriculture sector saw an upward revision of prospects to 3,7 percent by the Ministry of Finance and Economic development. The World Bank had pegged the country’s growth at 3,8 percent while the International Monetary Fund which initially projected a contraction of 2,5 percent revised the country ‘s growth prospects to 2 percent.
Performance in critical sectors such as the mining and manufacturing sectors will be at the mercy of the growing foreign currency challenges as retooling and capacity building initiatives are thrown off the rail by challenges in paying for critical spares, capital equipment as well as raw materials. The economic prospects are skewed more towards the conservative if not gloomy outlook given the status quo.
The recent performance on the stock exchange defies both technical and fundamental analysis theory. From a fundamental perspective the share price should be a reflection of current and prospective company performance reflected in financial statements. From a technical analysis perspective, the theory of mean reversion dictates that, in the long run there will be a revision of price to the mean as market forces correct short term mispricing aligning prices to the average price which in most cases in close to the intrinsic value.
The table to the left shows an extract of the price increases that have occurred on ZSE listed counters in 2017 as at 13 September 2017 from the recorded lowest prices in 2017: for the top 25 gainers
The table is jaw breaking and at the same time heart breaking to some like me who missed the opportunity to jump on the horse before it became a runaway rodeo. But even now the market can still gain momentum because the same challenges that induced the flight to the stock market are still prevailing. If investors have to make a choice between a ticking stock market time bomb and uncertain bank balances, the value erosion of cash balances of the 2007 to 2009 era would have most choosing the former.
A close look at the recent financial performance of the companies in the table above reveals performance which falls short in no small way, of justifying the humongous price increases. But if history is anything to go by, the financial crisis of 2007 – 2008 bares testimony to the chaos that has often accompanied financial bubble bursts. A lot of individuals and institutions lost immeasurable value over night as the financial bubble burst.
Our market seems to be on a similar trajectory as an unjustified upwards trend launches the market to dizzy heights bringing along the very probable reality of an imminent crush which will leave many with only memories of this paper gain which is not backed by fundamentals.
Pension funds and insurance companies would take hedging initiatives and not throw caution to the wind as they stand to lose policy holder funds when the bubble finally bursts, depending on the point of entry into the market.
However, for the active investor who has managed to pursue a constant mix portfolio rebalancing strategy the pay day will be huge and if the status quo is maintained it will be even larger for those who avoid loss aversion bias and hold fort to the 11th hour just before the bubble bursts.
- Albert Norumedzo is an Equity and Alternative Investment Analyst who writes in his own capacity feedback at [email protected]
