Did you bet on the winner?

By Admire Mavolwane

THE just-ended second quarter was, to all intents and purposes, not so profitable for stock market investors. A number of events, particularly the post-election monetary policy overhang,

suppressed activity on the bourse.


With the first three months of the year having seen the benchmark industrial index putting on a massive 126%, the 15% gain attained in the April to June period could be regarded as peanuts. The measly return over the quarter masks the fact that the industrial index peaked at 3 237 790,99 on April 15 and, at that stage, was showing a 195% growth on a year to date basis.


After that peak, two catastrophic events, which by and large have now been discounted, occurred and provide an alibi for the poor performance on the bourse. What is peculiar about April 15? This is the day the governor hosted that now infamous luncheon for bankers aimed at discussing and soliciting their views in preparation for the all important post-election monetary policy statement.


At this stage, many thought the statement would be delivered after the Uhuru Holidays. Vibes from that get together were that the governor had not minced his words, and had unequivocally expressed his dismay at the performance of the stock market.


As mentioned earlier, shares as an investment option had by then exhibited a high level of buoyancy, or “exuberance” as the governor described it, and had thus outperformed other investment channels. As the news filtered into the market, speculators, who by their very nature are nervy, scrambled for the only available escape hatch and pressed the red “sell” button.


However, this was not to be as the week after the holidays passed with the ZBCH outside broadcasting vans nowhere near the environs of 80 Samora Machel Avenue. As it dawned on investors that the policy statement would be delayed for a then indefinite period, they started trooping back into the market, albeit timidly at first.


Rumours that the governor had resigned only served to bolster the investors resolve to keep on at their game. The monetary policy review when finally delivered on May 19 had two, rather than one, appendages – namely “post-election and drought mitigating” – and saw selling pressure forcing the industrial index southwards again.


The bears’ dominance in the market lasted until yet another mid-month date – June 15 this time. At this stage the index had long floundered past the 2,5 million mark and was swimming in the 2,3 million waters. Doomsayers were even predicting that the index would probably drop further and settle around the 2 million levels.


Investors were however prodded back to life by the publication of the May inflation figure which although not totally unexpected, showed a 15,3 percentage points push to 144,4%from the April rate of 129,1%. Since then the bulls have been on the ascendance.


June 30, which marks the mid point for the year, saw the industrial index on 2 846 393,57 points reflecting a 157% return on the opening position of 1 097 492,53 points. The index, being a market capitalisation-weighted composite number masks some sterling individual performances.


Careful stock picking and nerves of steel accompanied with a fair bit of luck could have seen investors enhancing their net worth by as much as 1 000% during the first six months. To answer the obvious question we provide a table for the top five performers;


How then does this performance compare with alternative investment forms? The foreign currency market: starting with the official one which most suspect is managed with the rate being coaxed upwards infrequently, shows a return of only 77%.


Of this, 43 percentage points were attained after the all important monetary policy statement. For those interested in the numbers, the auction rate opened the year at $5 736,87 per American dollar and had depreciated, or to be politically correct, the support price had increased to $9 899,14 by June 27.


By contrast, the much maligned alternative market, which operates parallel to the official channels, hence the name “parallel market”, has, for lack of a better word, made “rich man” of some people. In January, $8 000 could buy US$1 which six months latter can be converted back to the local unit at $28 000: US$1. Thus in six months the holder would have earned a massive 250% return.


The above example also shows how the gap between the official and the alternative market has widened. From an initial margin of $2 263,13, the gulf has widened to almost $18 101 – some would argue that this made the risk of a compulsory invite to be a guest of the state worthwhile.


It is very difficult to really analyse returns on the money market as one has to make some rather simplistic assumptions about investment rates, durations and decisions on maturity, which are rarely borne out in practice. Take the hypothetical example of an investor who buys a 91-day treasury bill in January 2005 at a yield of 106% per annum.


Assuming that at maturity the investor rolls over his investment at the going yield, which at the end of March was 95%, by June 30, the risk averse investor would have earned an effective return of just 56% for the six months. An investor rolling over weekly would obviously have earned a relatively higher return. However, such a strategy would not have resulted in returns comparable to the stock market.


Although foreign currency did outperform both the broader stock market and money markets in the first half, the risks in the latter asset classes are comparatively lower.


The stakes will obviously be raised in this environment we are now entering. We shall not talk about fuel, but from the early look of things this could well be the market to be in as we go into the second half of the year.