IN NORMAL economies, when an important announcement is made, the stock market responds according to the perceived impact. The market cheers up on supposedly good statements while a negative event often leads to price weaknesses. It is unusual for a market to be indifferent to major economic events.
Even at the worst of the recession, the US and European markets would still respond favourably to any positive announcements. The excitement would be short-lived though, because of recession worries, but the fact is that the market would have reacted. As recent as last week, the markets that had largely been languid because of the problems in Europe re-awakened after the second quarter reporting season in the US began on a strong note with better-than-expected earnings. Equally, when Wall Street investment bank, Goldman Sachs, announced on Tuesday that its quarter two profits had shrunk by 82%, the US markets took a knock at that time before the release of better financial results by other companies revived the uptrend.
The simultaneous presentation of the Mid-Term Fiscal Policy review statement and the granting of permission to the country to sell some of the diamonds from Chiadzwa were significant economic events, but the local bourse did not react to them. Among the highlights of the review statement was the admission that only a quarter of the US$810 million pledged by foreign organisations was received in the first half of 2010, but other revenue headings performed better than expected. If the first part was disturbing, perhaps the second could be reassuring. But sadly, the disclosure in the same document that capacity utilisation in the economy had remained stagnant at 35%-40% implies that contrary to the indication, the growths in value- added, pay-as-you-earn and corporate taxes in the first six months of 2010 may not have resulted from an improvement in economic performance. Ask any player in the industry and the most likely response is that economic conditions as well as the outlook are much worse than last year.
Concerning the diamonds, only a few people have publicly expressed optimism that the economy will receive a major boost from the anticipated sales while many others have chosen to be more circumspect about it. According to the fiscal review statement, the country has in stock 4,7million carats of diamonds mined from Chiadzwa and these are said to be worth anything up to US$1,7 billion. If the latter valuation is reliable then there is good cause to be excited. A windfall of that much, or even a third of that, will go a long way in lessening the liquidity problems in the economy.
If the proceeds from tobacco sales plus the liquidation of some of the special drawing rights (SDRs) from the International Monetary Fund managed to bring down the lending rates from the peak of 35% in 2009 to about 20% this year then certainly an injection of US$1,7billion into the economy could push borrowing rates even lower. Further mining operations at the same fields should rake in more and more money for the country. So why is the stock market not thrilled given this seemingly good news?
Well, the answer to that is not obvious. Possibly it is because of the lack of clarity on the matter especially regarding ownership of the gems and how the country will benefit from the sale. Investors chose to be more vigilant although that might mean missing some opportunities should things pan out positively. But sometimes it is prudent to miss an opportunity than jumping on a bandwagon without sufficient information.
Memories of 2009 are still fresh when investors bought heavily into equities on the expectation of a strong growth in the economy. True, the economy registered positive growth for the first time in more than a decade, but the expansion was not at all sustained. Those who purchased the shares at the peak period when the market capitalisation was above US$4 billion — and they are many — are watching painfully as their investments are being depleted almost on a daily basis.
The market is already weighed down by an overhang of political uncertainty caused by the talk of another general election soon and the failure by political parties to fully implement their agreement. While some investors had discounted that factor in their decisions, the introduction of the indigenisation policy in March scared away foreign capital and that is very evident from the stock market’s low activity. It seems like those two factors will continue to impact negatively on the local investment climate thus making any supposedly good pronouncement largely inconsequential.