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Investor guide: Picking cherries among thorns

By Lance Mambondiani

THE business of predicting markets is a dismal science. Since the market is now trading without a correlation to basic fundamentals, investment beh

aviour on the ZSE seems to be driven by behavioural finance than any real technical analysis.

Textbook portfolio management tells us that the best way of predicting the direction of the market is by looking at interest rates, inflation, GDP growth rate, fiscal reforms and performance of listed companies.

Quite simply, real life investors are not rational beings; they are driven by their emotions. There are few counters on the ZSE whose share prices are trading on what they are worth rather than what investors think they are worth.

Back in the 1930s, economist John Maynard Keynes compared the stock market to a contest which was then popular in British tabloids, in which contestants had to look at photos and choose the faces that other contestants would pick as the prettiest.

Similarly, stock market analysts try to guess which stocks other traders are likely to buy. The successful punter is the one who predicts the “pretty” one before others claim a prize on it, buying on a low and profiting on the high.

If the truth were told, anyone can make money in a bull run. A portfolio of stocks chosen by a chimpanzee at random would have performed no worse than those carefully chosen by an “expert” portfolio manager.

Any serious investor who doesn’t see dollar signs in their eyelids when they look at the stock market right now has no chance buying and selling tomatoes profitably on a road side in Kuwadzana, Mbare or Sakubva market.

The bull run on the ZSE has been a “matter of defying the financial gods”; on a basic level, it has been possible to turn something that’s inherently unstable into an advantage. The current rally together with last week’s “steaming off” is hardly unexpected.

It depicts the self-reinforcing mechanism of the markets. Although the fuel for the bull run remains the low interest rate policy and hyperinflation, the reason why share prices have been tripping over each other shows the way investors gain confidence from the confidence of others, regardless of whether it is justified or not.

Investors and the market become bullish mostly because everyone else is bullish.

It is also quite possible that the rush of the Zimbabwe dollar, fleeing inflationary hegemony can create a colossal stock market “bubble”.

The beauty of a bubble is that it creates an overvaluation in the bubble sector and an undervaluation elsewhere. Although we don’t quite believe any other legitimate financial instrument can give investors better returns than the stock market at the moment, convincing investors to look elsewhere is expecting a miracle.

So is the ZSE now more of a fantasy casino than a legitimate market?

In a casino, a player is more likely to gamble themselves to poverty.

On current ZSE statistics, an investor has more chances of hitting the jackpot than ever before. At the moment, momentum trading is driving the market.

Herd behaviour has the effect of lifting investor optimism as investors seek to profit by jumping onto short-term market trends.

The mining index, surging on the back of firming international metal prices is having a pulley effect on the main index.

No analyst would have predicted that five mining counters on a sub index would be trading higher than 76 counters on the main industrial index. It defies logic.

According to figures released by the central statistics office, annual inflation has soared to 7 982% in September gaining 1,389.3% points on the August rate of 6,592.8% despite the price controls introduced four months ago.

There are however no fundamentals suggesting the market will ease, at least for now. Empirical findings suggest that in an efficient market stock market returns and the inflation rate have a negative relationship.

Inflation has a huge impact on stock valuations.

Lower inflation means higher price/earnings ratios and higher stock prices and higher inflation means lower price/earnings ratios and lower stock prices.

The ZSE is contradicting theory; current trends have clearly indicated a positive rather than negative relationship between Inflation and stock market returns. So what then is the basis of our long-term optimism?

With no balance of payments, much of the economic problems are because the economy is imploding, based on inward looking strategies within shrinking productivity levels.

According to the IMF’s October 2007 World Economic Outlook, with the exception of Zimbabwe, Sub-Saharan Africa is enjoying one of the best periods of sustained growth since independence with low to moderate inflation rates. The economic problems in Zimbabwe are not likely to last forever.

The wise are those who prospect ahead of any “gold rush”.

The diaspora population may yet play a significant role in any of this metamorphosis. A 2006 study by international organisation the Office for Migration (IOM) found that apart from economic remittances, nearly three quarters (73%) of respondents wanted to participate in a skills transfer programme whilst 77% wanted to contribute to the development of Zimbabwe.

Until that reality unfolds, investors will continue to seek cover under inflation hedges provided by the stock market, the property market and forex markets. That is hardly being greedy; it is a matter of survival.

For the first time this year, one United States dollar was worth more than one million Zimbabwe dollars on the parallel market.

The ZWD: GBP rate passed the psychological $2 million dollar mark blowing wide open analysts’ predictions that the rate would close the year on that mark.

Having closed last week at $1 500 000 to the pound, the dollar lost approximately 40% of its value on the parallel market to close this week at $2 100 000.

Sustained pressure is due to money supply growth, too much Zim dollar chasing scant currency reserves on the parallel market.

The importance of remittances as a strategic contributor to balance of payments requires revisiting.

A IOM report compiled last year found the diaspora remittances reveal staggering significant statistics.

Of the respondents surveyed, 18% said they were remitting on average US$565 per month from the UK and South Africa, another 18% said they send between US$377 and US$563. Thirty-seven percent were sending between US$188 and US$375 a month, while 27% remitted less than $188.

Previous research suggests that there are approximately 3.5 million Zimbabweans in the diaspora.

Taking an average remittance of between $350 and $500 per month on a diaspora population of 1 million would yield an average monthly remittance of US$350 million to US$500 million per month, enough to fund critical supplies.

The benefit of these remittances is lost through parallel market activities due to an unfavourable exchange rate regime. Forty-seven percent of the respondents in the IOM study wanted a better exchange rate to help them to contribute or contribute more effectively to development.

International markets gave investors a scare at the close of last week. In the UK, the market opened the week on Monday in a panic.

The FTSE 100 fell sharply due to a cocktail of that dose of bad news from America, higher oil prices, a weaker dollar and troubled credit markets raising fears for a global recession.

The FTSE 100 opened the week down 110, or 1,7% to 6421,6 with fears of the return of the infamous Black Monday 20 years ago when the Dow Jones Industrial Index fell 22.6% in a single day.

The fall is equivalent to more than 3 000 points today.

By mid week sense and sensibility appearsto have prevailed.

Markets finished in positive territory — shares buoyed by the ongoing fall in crude oil prices and better-than-expected (so far) Q3 numbers out of the United States.

In international markets a day can make all the difference.

On the FTSE, Umbro surged 25,50 to 190,50 on Tuesday after NIKE confirmed that both parties had agreed on a recommended cash offer of 195p per Umbro share, including an interim dividend of 1,94p.

The agreement values Umbro at approximately US$582 million. Fears of a US recession are expected to linger and the market is expected to remain unstable for some time. Weekly Tip

A bull market always results in a rush of money from rookie investors.

Many will get burnt catching the falling swords.

Avoid the temptation of flicking a coin to pick your stocks, you will suffer in a correction. Exercise caution. For diaspora investors we recommend that you follow the red flag causing the bull run.

PPC, Old Mutual, Meikles and BAT are always good buys. If you have the cash to splash, mining counters can be considered. For investors in Zimbabwe think of mid-tier and small cap counters, Tanganda, Turnall and Celsys even Zimpapers, they may surprise you. If in doubt, go for value, not fashion.

lLance Mambondiani is an investments executive at Coronation Financial, an international financial advisory company registered in the UK trading in Southern Africa and the United Kingdom.

He can be contacted at coronation.uk@btinternet.com .To subscribe to our mailing list, contact us.

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