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The good, the bad and the ugly

WE have passed the first six months of a turbulent year. For the greater part of the first half the equities market has been depressed, largely keeping momentum investors at bay. However, this changed towards the end of May as the industr

ial index, propelled by the lower investment rates, rose 80% closing at 693 147 points as at June 30.

The mining index was down 4% to close at 155 768 points during this time, on the back of losses in Bindura and Falgold, which have a high weighting on the index.

In minings, Ashanti and Ashanti ZDR were de-listed from the Zimbabwe Stock Exchange (ZSE) after the merger with Anglo Goldfields.

Counters to remain suspended on the ZSE bourse at the close of the half were Barbican and TZI.

Surprise, surprise – it appears we might be in a year full of surprises with Greece having surprised all and sundry by running away with the Euro 2004 Cup. Among the biggest movers for the six months were the “traditional” safe havens that in yesteryears have struggled in terms of capital appreciation – having generally lagged behind the industrial index (underperformed the index).

Financial counters anchor the top two positions CBZ and Barclays and generally manufacturers are mostly at the bottom end of the league table (Gulliver, Tedco, Trust, Steelnet and Astra). Generally at the bottom end are the high beta stocks, which rallied significantly last year.

With the turmoil that rocked the financial sector late last year and early this year, very few (or is it none at all) would have bet on financial counters outperforming the index. Are they still making supper profits that they have been making?

Financial counters seem to be adept at interpreting rules to their advantage. The sound financial counters were duly rewarded as evidenced by the appreciation in their share prices. These financial houses have been viewed by investors as running conservative books over the years and the perception is that they were prepared for the sudden change in events.

An investment horizon of six months is a short period to make any meaningful conclusions for equities.

Over the same period, investments on the money market would have yielded returns of around 300% annually (taking a possible yield on the financial bills) for the six months giving an effective year to-date return of around 150%.

In the first six months investors who selected wisely on the equities could have theoretically received better returns than other investment options, except if they had actually crystallised than realising the actual returns. That said, investors should learn to protect their profits, crystallise when the opportunity arises and avoid being too greedy.

Going forward, be warned that past performance should not be the basis for optimistic conclusions. Earnings

Taking a look at some “holding” counters on the ZSE, which are quoted at prices lower than their subsidiaries just baffles many alike. Counters that quickly come to mind are Zimre (with significant shareholding in Fidelity and Nicoz Diamond), Cottco with a 34% stake in Seed Co and to some extent TA with Zimnat and some fantastic assets such as Sables.

It seems that the adage of diversified earnings base at times isn’t that rational. These counters appear to be dogged by negative perception.

However, markets are known to be irrational. Investor perceptions do not die away rapidly, but given a longer time-frame they gradually become rational. Maybe the market is not convinced by the potential possessed by such diversified revenue streams.

The market appears to be sceptical about some unbundled operations, maybe shareholder value has been destroyed – actually assets have been stripped. The buzzword for this year is likely to be mergers and or restructuring of operations as opposed to unbundling in 2002 and 2003.

Mergers are most likely to be concentrated in financials (already Century and CFX with other deals also being considered). We hope in all this restructuring we will not see some recently de-merged units merging once more as the operating environment continues to challenge – and surely investors will question the focus in these companies. Recently we have seen strategies being changed in a space of less than a month, one time it’s unbundling (oops asset stripping) then it’s restructuring, where is the focus here? Or is it a high degree of adaptability?

Strategies for business should be for the longer-term. The perceived lack of business focus and failure to execute just makes the concerned companies to be viewed as dogs once the board and management’s credibility is questioned.

-Disclaimer: Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the authors, and do not necessarily reflect the opinion of Sagit Financial Holdings (Pvt) Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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