A new wave of global market fears is rising

ON May 4 2010 the volatility index (VIX) rose sharply by 4,8 points to 24,6 points after averaging less than 20 in the past two months.

For investors, this should be a cause of concern but it is hardly surprising. A rising VIX worries investors because it signals growing uncertainty about future prices which usually prompts investors to unwind long positions or alternatively short the markets. In recent days global markets have been jittery because of anxiety over the financial turmoil in Greece and the fraud charges levelled against Wall Street bank, Goldman Sachs, by the US SEC.

Pledges of aid packages to Greece by its European peers and the IMF brought some short-lived relief as other members of the block are feared to be in a similar, if not worse, fix. This is putting the euro under immense pressure and it has lost 10% against the dollar since early December 2009. Charges against Goldman, on the other hand, once again bring to the spotlight the role played by the banks in causing the global financial crisis.

These two and other comparable negative news such as high US unemployment make the sustainability of the latest world economic recovery questionable. This inevitably pushes the VIX higher.

The VIX, also known as the “fear factor” is an index calculated by the Chicago Board Options Exchange (CBOE) to measure the volatility, or price fluctuation, of Standard & Poor’s index options. It foretells the rises and falls of the markets over the next 30 day period. Markets tend to swing up and down when there is uncertainty which implies that a high VIX indicates bearish sentiment while lower percentage points denotes bullishness.

Its historic peak was 89,53 points on October 24 2008 and the more discerning market followers would know that this was when the financial crisis worsened. Before then the peak was 38 points recorded on  August 8 2002. The current level of 24,6 points which from the chart looks set to rise higher might be signalling another significant wave of risk aversion in the global markets in the next months, at least.

Well, Zimbabwe is barely affected by world trends and that could count for good news if the VIX continues to drift upwards.

But that is as far as the good news goes. The local market has its own fair share of problems different from what the whole world experiences. Our “VIX” has been high for more than five months propped up by negative political developments. The market peaked at US$4 374.76 million on November 11 2009 but is now 14,75% lower. The widely hyped recovery of the economy has not happened as earlier anticipated.

Most companies reported very weak earnings in 2009 with growth in the current year only expected to be marginal unless access to capital improves. This left several companies overvalued relative to their earnings potential.

 

To maintain equilibrium, share prices had to be offered lower. The correction coincided with the introduction of empowerment rules and the subsequent withdrawal of foreign money from the market. In the end the “fear index” was pushed even higher.

Summing up the earnings from the most recent corporate financial statements gives after tax profits of US$146 million, 77% of which came from Econet. This figure is arrived at after annualising half year results which may be unfair for seasonal companies such Seedco. But that is beside the point.

 

What is apparent is that the market maybe overvalued at capitalisation of US$3 469 million as of May 5 2010 unless players expect dramatic increases in earnings.

 

A historic market p:e of 23,8x in US dollars makes investors worried in other territories, more so here where the economy is expected to grow by only 2,2% in 2010 and remain stagnant in 2011, according to latest IMF projections.

Total dividends paid since dollarisation amounted to US$26,4 million with only four companies, namely, Colcom, Econet (94% of the total), Innscor and Zimplow having paid out something to their shareholders. This gives a market dividend yield of 0,76%, once again a disappointing statistic relative to alternative markets in the region.

Having said that, there are some very exciting stocks, few though, on the ZSE with promising futures. Without naming names, any counter trading at 10 times, or under, its historic earnings maybe worth short listing for further analysis. Admittedly not too many will pass this hurdle.

The few that do so on the back of core earnings (take off accounting profits like tax credits, fair value and non recurring items) have a better chance of growth in their share prices even as the VIX remains firm.  In other markets, a high “fear factor” usually prompts shorting, a practice that is outlawed in this country.

 

Ranga Makwata

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