ZSE’s Black Monday

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As of Friday August 2, the Zimbabwe Stock Exchange (ZSE) had advanced a solid 51,72% since the beginning of the year.

Victor Makanda

Most market watchers were proved wrong by this phenomenal result as they had assumed a bearish outlook for the stock market in 2013.

Political uncertainty in the run-up to the harmonised elections held on July 31 was cited as the major downside risk to market performance. This view was premised on how the stock market performed during previous run-ups to elections.

As the famous quote by George Burns goes; “everything that goes up must come down”. The bubble finally burst on Monday August 5 after the announcement of the election results.

While it is normal for stock markets to react whenever a new government is elected, the extent of the decline left many market participants astonished even though it had been expected to some extent.

The mainstream index lost a solid 11,09% on the day trimming down the year-to-date return in a single day from 51,72% to 34,89%. Market capitalisation fell by a strong US$626,33 million to US$5,41 billion.

It would appear that losses on the ZSE were driven by panic selling. The local bourse was thus painted red with losses in heavyweights. Delta was down 20%; Econet 15%; Innscor 14%; OK Zimbabwe 13% while Hippo lost 5%.

The index decline became the second largest drop since dollarisation after the 17,3% decline recorded on February 27, 2009.

Most market participants labelled August 5 “Black Monday”, closely likened to the historic “Black Friday” of November 14, 1997.
On that fateful day the Zimbabwe dollar lost approximately 71,5% of its value. Equities on the very same day had close to 46% of their value wiped away.

Gratuities paid to war veterans, land reform and unbudgeted war support for the Democratic Republic of Congo were among the major reasons advanced for the 1997 losses.

Such tragic one-day declines are not confined to the Zimbabwean economy. On October 19, 1987 –– dubbed “Black Monday” –– the global markets recorded their largest one-day percentage decline in stock market history.

The reason behind the slump of our local market on August 5 could be investor uncertainty as to the future of the economy or maybe they had expected a different “favourable” result.

The fact that the elections are being disputed by the opposition with allegations of massive rigging does not instil confidence in an already fragile market.

There are a lot of questions that remain unanswered, chief among them the future of the multicurrency system and uncertainty with regards to economic policies that are likely to be pronounced by the new government.

The memories of hyperinflation are still fresh in people’s minds and hence any anticipated shift in the status quo is bound to be viewed with panic.

A lot of people lost their pensions and savings during the hyperinflationary days and a repeat of such a scenario sends shivers down the spine. There is, therefore, a need for the new government to quickly move in and reassure investors on the way forward with regards to the multicurrency system and its economic policies if the on-going haemorrhaging is to be abated.

While history is often used as a guide to predicting future actions, the focus now relates to the future.

Could this be the turning point for the ZSE? Will the stock market register positive gains up to the year-end? Will offshore investor perception of the new government persist considering they have been the major participants on the local bourse? Will the liquidity crisis tighten further? How will investors view Zimbabwe’s country risk?

These are just some of the questions on the minds of most investors.
Market watchers who had a pessimistic view at the beginning of the year have been proved right.

With four months left before the curtain comes down, the bearish sentiment may well be maintained in the short to medium-term until a time when investors get some direction as to where the economy is headed.

The extent to which offshore investors will perceive our country risk may well be a major determinant on how equities will fare.
As highlighted earlier by Burns some stocks, following the plunge may not go back to their previous highs as new trading levels will most likely be set.

The same may also be true for the index as it may fail to recover to the record highs set on August 2 before the election results.
While acknowledging the cloud of uncertainty hovering over financial markets in the country, consolation may be found in the unofficial rumours spreading within the public domain which relate to a possible delayed return of the Zimbabwe dollar as the official currency.

This is due to the general consensus by economic agents that the economy would need to fully recover before the currency can be reintroduced.

The jury is still out on how the local bourse will perform by year-end but volatility may be the new normal.

As to whether the ZSE will be among the top performing stock markets in Africa at year-end, only time will tell.

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