By Willing Zvirevo
“Only when the tide goes out do you discover who’s been swimming naked” — Warren Buffet.
ONG>AS persistent power and foreign currency shortages continue to frustrate hopes of an economic recovery, the Zimbabwe Stock Exchange (ZSE) remains buoyant. Negative interest rates and spiralling inflation have resulted in a stampede for stocks on the ZSE. Sustained buying pressure on the market is driving share prices northwards. Undoubtedly, the ZSE remains one of the world’s best performing stock markets.
The money market ended the week in a surplus on the back of fiscal-backed inflows in the form of significant disbursements of concessionary funding under the Agricultural Mechanisation Programme (AMP), Basic Commodities Supply-Side Intervention Facility (Bacossi) and Agricultural Sector Productivity Enhancement Facility (Aspef).
Interest rates plummeted on the back of high market liquidity, with the market offering interest rates of between 0-100% for seven to 14-day money and rates of between 120 and 150% for 60 to 90-day investments.
Given the gloomy inflation outlook and the severity of value destruction on the money market, the high demand for assets on the ZSE is expected to continue for the remainder of the year and way into 2008.
The current low interest rate policy is designed to support the productive sectors of the economy, particularly agriculture, and to ensure that government’s domestic debt remains within manageable levels. With that in mind, the low interest rate environment is expected to remain in force.
Most investors have made money even on companies whose corporate fundamentals are fast deteriorating. However, investors should never lose sight of the fact that the current performance of most stocks on the ZSE, and indeed of the entire stock market itself, is being driven by a desperate search for value preservation on the part of the investor as opposed to corporate fundamentals.
The current tide will certainly not last forever. Investors should be prepared for a market correction at some stage. It may take long for this correction to take place particularly given the current low interest rate policy and the run-away inflation, but the bubble will certainly burst at some point in the future. When that happens, investors whose investment decisions are being driven by gut reaction and emotion are likely to get hurt most.
With the business sector experiencing a myriad of challenges, chief among them being the incessant power cuts, crippling foreign currency shortages and price controls, there is no doubt that the current stock market boom has masked the fact that thousands of businesses are struggling and the economy is still in recession.
The stock market is simply refusing to mirror the reality of the economy. Yes, the market has churned out multi-billionaires within just a couple of months, but buying and selling of shares in the way that we have seen on the ZSE does nothing for the economy. Most of the money being made is not being put into productive use. In short, the economy is being hollowed out!
Most investors wishing to hedge against inflation are now only looking at three investment options: shares, foreign currency and property. Therefore, the winners in today’s Zimbabwe, at least in the short term, are share traders, currency dealers and estate agents.
To date, the Zimbabwean stock market has stayed ahead of inflation and is expected to remain that way throughout the year. Most investors in Zimbabwe are benefiting from market distortions, and there is simply no place for investors who are cagey about the Zimbabwean market risk. However, this is by no means telling anyone to invest blindly; there are certainly some fatal pitfalls on the stock exchange!
While the market is likely to continue moving northwards, the advise to investors is to consolidate their gains by taking profits on counters that would have gained in leap fashion, particularly those counters that do not provide a currency hedge or are not backed by a strong brand, export receipts or a consistent profit history.
Remember the old adage: a bird in the hand is worth two in the bush. You can’t continue counting on paper profit, you need to bank it! Some investors are also holding on to non-performing stocks. Even in a bull-run situation, there are some counters that simply do not perform.
To such investors, Warren Buffet has this to say: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Some people make money, others die trying! Which one are you?
With the money market in surplus due to the funds being released under the various facilities for agriculture and industry, we expect interest rates to continue being depressed. This should work to the advantage of the stock market as investors continue seeking value protection on the equities market. Parallel market rates have slowed down, making the stock market the most preferred investment option. Excitement in the next trading week may also be spiced up by the release of financial results by companies that have March/September reporting periods.
As is the norm, the market may temporarily slow down in December as fund managers wind up their portfolios and other investors take profits in preparation for the festive season. Some counters may therefore take a knock but this should not scare the long-term investor as the conditions that have caused the current rally are expected to filter into the first quarter of 2008.
However, the recent directive by government that retailers and manufacturers should price their imports based on the official exchange rate is likely to impact negatively on the viability of manufacturers and retailers who depend on the parallel market for foreign currency, and may induce further shortages on the market.
Foreign currency is hardly available on the official market, with the result that businesses have resorted to the parallel market for their foreign exchange requirements. The impact of this directive on the stock market will largely depend on how the directive is going to be enforced.
There is also high expectation on the part of the authorities that the provision of concessionary funding to businesses under the Bacossi facility will result in increased production. The biggest challenge that local manufacturers are facing is the unavailability of cheap foreign currency, not the shortage of cheap local currency. Therefore, the provision of cheap local currency is welcome by the business community, but it does not provide a solution to the critical shortage of foreign currency. The cheap money is likely to flood the