Santa Claus comes to town early

By Willing Zvirevo



THE stock market has remained defiant to the myriad of economic challenges the country is facing, with both the industrial and mining indices remainin

g firm.


Due mainly to expected profit-taking episodes, the week ending November 16 was characterised by mixed trading, with marginal gains in the early part of the week being followed by losses as the week progressed.


However, despite being a little sluggish, the stock market remained bullish, propelled largely by fundamentals of money supply growth on the ground and what now appears to be a voracious appetite for stocks by investors.


Most investors who took profits on counters whose prices were almost exploding will certainly have an early Christmas. The challenge for most investors remains what to do with the profit now sitting in the bank.


Our advice is simple: do your Christmas shopping, spoil the kids, pay off your debts, reinvest the balance in undervalued stocks and thank God it was a bull-run year!


There are some who are still so risk-averse that they would rather miss the vast opportunities on the stock market than put their money at risk. The trouble is if you don’t risk anything you lose even more.


The writing is on the wall that as long as returns on the money market remain grossly negative, the stock market is likely to remain the main investment destination. There are people who still feel that investing on the stock market is speculative, just as good as gambling.


Speculation and investment are two different things, even though both may take place at the stock market.


Just to borrow from Fred Schwed Jnr: “Speculation is an effort to turn a little money into a lot. Investment is an effort to prevent a lot of money from becoming a little.”


Investing on the ZSE is therefore a genuine attempt by investors to make real returns and protect the value of their hard earned money in a very inflationary market.


Generally, in a bull-run situation most investors make money. As investors continue buying and share prices continue rising, almost anything you buy goes up. It makes you feel that investing in stocks is very easy and safe, and that you’re a financial genius.


In most stable markets, where there are no market distortions characteristic of the Zimbabwean market, stock market investment and portfolio selection are done based on a careful analysis of political and
economic developments and corporate fundamentals.


The current market conditions in Zimbabwe have made almost everyone feel that stock market risks are at their minimum. Over-confidence and optimism have taken over, and the most elementary of precautions are evidently being watered down.


While we believe the current bull run will be followed by a market correction which should take place sometime in the future, particularly given that some counters hardly have any strong corporate fundamentals to back their current prices, we do not expect the correction to come in the form of a market crash.


A market crash, as distinct from a bear market, is characterised by panic selling and abrupt plunges in share prices.


The current bull run is not being driven by economic optimism and neither is it being driven mainly by expectations of strong corporate performance.


For that reason, and barring a dramatic shift in monetary policy thrust, any negative economic information that filters into the market such as inflation increases, weakening currency, widening budget deficit and increased government debt is not expected to perturb the market.


However, when the market starts correcting, counters that are not backed by strong corporate fundamentals will be affected more. We therefore advise investors who have a low appetite for risk to base their investment decisions on corporate fundamentals. We also recommend investors to take a medium-term view so that they will not lose sleep over short-term losses that may come with continued profit-taking episodes.


The market continued on a downward
trend on Tuesday with the industrial index declining by 9,31% while the mining index lost 10,53%.


While there were widespread losses across the industrial counters on Tuesday, the crowd pullers were PPC, Old Mutual, Circem, Chemco, Econet, TA, Tanganda and Delta. The only movers in Tuesday’s trade were NicozDiamond and Interfresh.


As investors continue to take profits, we expect the market to continue on a downward trend before steaming off ahead of the festive season. Investors should capitalise on current weaknesses and take positions ahead of year-end. Our favourate picks currently include CFI, NicozDiamond, ABCH, Zimsun, Econet and ZHL.


Both the 2008 fiscal budget and second-half monetary policy statement for 2007 are expected to be presented before the end of the year. Given Government’s current debt position and grandiose funding requirements, as well as the continued injection of concessionary funding into the market by the central bank, we expect the inflation spiral to continue in the short to medium term, fuelled by unyielding money supply growth.


In the absence of huge foreign funding and/or increased productivity across all productive sectors of the economy, the central bank will find it extremely difficult to adjust interest rates in line with inflation; hence we expect investment rates on the money market to remain depressed.


The stock market is currently the main beneficiary of the continued increase in money supply and the negative returns on the money market.


Despite significant funding disbursements to the productive sector under the Bacossi facility, the market is still short of most basic commodities. It remains to be seen how this situation is going to be dealt with, including the pricing framework for imported raw materials and products which government has directed manufacturers and retailers to comply with. We believe the stock market will continue to remain attractive, and investors should buy into current weaknesses on a medium-term view.


However, investors should exercise caution and not be shrouded in the stupor of past gains when taking new positions. We have warned before that some counters are perennial non-performers, and the best way to get out of trouble is not to get into it in the first place.


While opportunities for quick gains are plenty on the ZSE, investors should also be aware that being a stock market investor requires patience, as sometimes your current holding may not be the best portfolio mix for the moment. Paul Samuelson puts it shrewdly and succinctly: “Investing should be more like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas.”


Willing Zvirevo is a financial consultant at Coronation Financial Plc, 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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