A minute of silence for ‘Black Friday’

By Lance Mambondiani

NOVEMBER 14 next week will mark the 10th anniversary of a day Zimbabwe’s economic nightmares really started. Zimbabwe’s economic crisis

is often traced back to November 14, 1997, a day referred to as “Black Friday”, when the Zimbabwe dollar lost 71,5% of its value against the United States dollar.

The stock market subsequently crashed, wiping away 46% from the value of shares as investors scrambled out of the Zimbabwe dollar. Debates are inconclusive on the real cause of Black Friday.

Depending on who is doing the analysis, the crash is attributed to a number of factors such as policy failures.

The failure of the IMF’s structural adjustment programmes has also been cited as a possible contributory cause. Some studies have concluded that the crisis was mainly driven by controversial government policies ranging from unbudgeted expenditure on war veterans to the controversial land reform and involvement in an unbudgeted regional war in the DRC.

Whatever the cause, the economy has failed to recover from this collapse with all macroeconomic indicators worsening.

Annual inflation in 1997 was averaging 25%. The previous year, GDP growth rate had averaged 8%.

Seems like a story from “a long time ago, in a far away country”. Compare that to current inflation at 7 982 % and negative growth rates going back many years.

Zimbabwean markets have an inexplicable history of internal shock absorbing mechanisms.

Companies have been holding on amidst deteriorating macroeconomic conditions, policy gyrations and international isolation.

Price controls introduced on the of June 25, 2007 caused the market to go on a nosedive with 62% of the counters trading in the red on the day due to panic induced selling. After a ten-year recession, lessons have been few and choices limited.

The selling mood triggered by government’s directive to manufacturers, wholesalers and retailers to slash prices to June 18 levels resulted in the industrial index retreating by 17.3% as the market fell to a 23 day low on the back of increased selling pressure.

Within a rally, it is easy to forget that there are some investors who are still holding on to non-performing mid-tier counters such as Truworths with a yield to date of 2 948%, OK (5 614%), Powerspeed (9 900%) and Chemco (7 757,1%). Some of these underpowered counters would have been affected by the price control policies introduced mid year.

The retail sector was the most affected. The impact of price controls is still enduring, evidenced by poor stock levels in retail shops such as Truworths, Number One stores, CW stores and Nyore Nyore all of which are themselves subsidiaries of listed retail counters.

Investors need to distinguish between retails counters that are perennial underachievers from those that are undervalued but with strong fundamentals.

Whatever the reasons for the poor performance, investors often have sympathy only to their pockets. If your investment has failed to hedge you against inflation consider cutting your losses and move on.

If the share price of a counter has not been influenced to rise by contagion effect of a Bull Run affecting the market for more than three months it is unlikely the share price will perform any spectacular acrobatics in the future.

Consider our exit strategy in the Coronation weekly tips below. Investors must ‘buy when pessimism is at its maximum and sell when optimism is at its maximum’.

The current price war has seen most businesses booking losses and others recording squeezed gross margins of below 10%, compared to monthly inflation which averaging 40%. Businesses are therefore faced with reduced revenues without a corresponding reduction in cost structures.

The shops are still empty. Be that as it may be investors will be looking at the year on the stock market as one of the most profitable in a long while.

The real danger of a bull run is compromised risk strategies by investors. Does it matter to look at risk, when the market is doing so well?

The starting premise of financial markets returns and the standard approach to risk is that they are normally distributed which makes it inevitable that a decline will follow a boom.

But “bell curves” or normal distributions in which most results are in the middle and extremes are rare occur in a static environment.

Unlike such normal distributions, ZSE returns have no meaningful average than can be assumed to represent the typical feature of the distribution and no finite standard deviation upon which to base confidence intervals.

This may explains why companies and ordinary investors are flocking to the stock exchange on the basis of inflation and monetary expansion forecasts alone. Compared to other investment options, the stock market has surprised many, outperforming returns on the property market and the foreign currency market.

So are suggestions that the market could outperform the parallel market due to the devastating impact of price controls. Our comparative analysis of returns on inflation hedge investment options suggests that the market will remain ahead all other investments on returns.

Since January 2007, the parallel rate has appreciated 32 551,90% whilst returns on the Industrial Index have reached 51 136,57%. Barring a major crash, the market will close the year as the best performing investment option regardless of price controls or the legality of the parallel market rates.

The bull run continued on the ZSE with the markets rewriting history. The market may be nearing strong resistance levels ahead of year-end. Investors are advised to be cautious going forward and book profits on the rise. Historically, the market always slows down nearing December as fund managers start to collect their commissions.

The rally will however most likely continue until December. Both the industrial and the mining index have been spluttering this week compared to previous gains, up 1,60% and 7,07% on Monday and 2,17% and 0,71% respectively on Tuesday. The pattern of marginal gains will be repeated for the rest of the week.

To an investor ‘in the money’ it hardly matters that the market is sluggish, as long as it is still pointing up.

Telling investors that it is time to sell off will always fall on deaf ears.

The mining index has broken through the 300 000 000 point mark and the industrial index seems certain to break through as well before the end of the week. Times are certainly good on the ZSE. Returns have certainly deviated from the norm investors need to absorb this rarity while it lasts.

The Zimbabwean dollar remains under sustained pressure on the parallel market. The ZWD: GBP rate edged 9,52% higher this week, trading at an average of $2 300 000 Dealers were picking up the US dollar in Harare and in the United Kingdom at approximately $1 200 000 with the South African rand being in high demand reflecting increased regional imports due to price control induced shortages.

In October 2007, the Zimbabwe dollar lost 154,14% of its value in a major slump which started in June wherein the currency was down 218, 23%. Analysts previously predicted that the Zimbabwe dollar would close the year battered, struggling to find a bottom on the other side of $2 million.

Current trends in which rates have accelerated have proved our predictions wrong. Our revised forecasts based on a weekly average depreciation of 15% per week suggest that the dollar may weaken beyond the $3 000 000 point mark to the pound by year-end.

The central bank may however change this superficially by introducing a new currency or by slashing the stubborn zeros.

* Lance 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.

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