ZSE bubble was not driven by fundamentals

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One of the more amusing tendencies of those who sometimes comment on the Zimbabwe Stock Exchange is the desperate desire to draw conclusions on the assumption that all who buy and sell shares are totally rational and level-headed people who carefully weigh the political and economic factors each day to decide what is the likely return on their shares before they trade.

This approach obviously does not explain the giant bubble that hit the exchange between September last year and last month and which probably still has a little more decline still to go as the last of the inflated air leaves the wheezy balloon.

So we have comments this week that suggest that the new Government of President E.D. Mnangagwa has failed to excite the investing public. And there were all those weird stories that when Operation Restore Legacy was launched panic-stricken investors started pulling out of the ZSE.

However these same commentators do not apply that reasoning to the start of the bubble. No one has ever suggested that the near tripling of prices in about two months from mid-September last year was sparked by a careful analysis that the imminent sacking of then Vice-President Mnangagwa followed by the expected elevation of the then First Lady to the Vice-Presidency with eventual rights of succession to the Presidency was likely to see a near rapid tripling in the size of the Zimbabwean economy. And it is highly unlikely that such an analysis would have commanded much agreement.

This is not to say that there were no periods of rationality. The industrial index did climb moderately but steadily from around 150 to around 200 between May and September last year. This roughly mirrored the rise in the black market price of US dollar banknotes and quite probably did reflect a desire by smart investors to protect the value of the their more liquid assets. It was unlikely at that stage that anyone was expecting dramatic changes in profits and dividends, so returns were effectively falling, but there was reasonable stability.

The mid-September start of the bubble had other causes. There was a jump caused by the panic on social media platforms that black-market exchange rates would be jumping. So more people wanted stable assets.

But these level-heads were quickly overtaken by the bubble-riders. These do not really care what the fundamentals are. They move into a bubble in the hope that they can ride it sufficiently well to make a lot of money very quickly by signing their names on bits of paper.

And some did very well. Many of us would have liked to have done what a handful must have managed by buying at just the right moment and then selling at an even luckier moment. So there must be at least someone, and probably a modest handful of very fortunate bubble-riders, who multiplied their bank balances two-and-a-half fold in two months. But the number cannot be large.

There must be another group who have seen their shareholdings almost halve in value already; these are those who bought at the peak of the market and have yet to bail out. They are the ones who funded much of the new fortunes of the better bubble riders. And there must be a large group who made a bit of money or lost a bit of money.

The institutional investors, pension and life-insurance funds mainly, have not really been affected one way or another. This group, who control the bulk of the shares on the ZSE, still own the same shares. They neither sold much nor bought much during the bubble, although some probably did some minor rearranging of their portfolios, and have come out the other side in roughly the same position as they were in at the beginning.

The big question now is if the bubble is over. There has been some modest stability over much of the last month, with the industrial index hovering a little over 300 but also dipping more often than rising.

What investors looking at the short term probably need to think about is how the index behaved in the first eight months of last year. The 300 level is still around twice what it was for most of the first half, and 50 percent higher than the slow climb from May. So all other things being equal there is probably some more slow fall in sight.

But not all things are equal. Several factors will apply. One is the balance of payments, the forex shortage. If more forex becomes available, the black market rate for forex will fall and that will probably see a fall in share prices. Good news can drive down prices if shares are overvalued according to the fundamentals.

Indeed the bubble burst as the country switched course for the better in the middle of November. If we take the 150 level as the base, then the present 300 is probably a bit high. If we take the 200 August index as the base, then the gap between real and calculated value is smaller.

Political changes are less likely. The ideological gap between the Government and the more important opposition parties appears minimal, although the opposition has not gone into detail of its offerings. So the election in mid-year cannot produce any radical changes. That would tend to produce stability. The election is more a test of which team will do the job better than on debate about just what the job they are called upon to do actually is.

Economic growth will pick up this year, and there is a more favourable climate for growth, and that should reflect in a higher share index, but higher than the middle of last year, not the days of the bubble.

So those interested in buying or selling on the ZSE probably have to look at the fundamentals to see if a particular share is worth buying, holding or selling. This means going back to looking at price to earnings ratios, dividend policies, opportunities for growth, quality of management, the skills base and other solid measurements.

And those discussing the exchange need to recognise that irrationality is part of the activity and stop trying to pretend otherwise.

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