Worst August since February 2009

Equity markets across the globe were cruel to stock market punters in the month of August. In the US the month has been dubbed as the worst since May 2012.

By Kumbirai Makwembere

Performance of the US markets was dragged down by a wait and see attitude as investors anticipated the decision the Fed would make with regards to tapering of ongoing quantitative easing measures. Markets were again rattled by geo- political instability stemming from attacks in Syria that prompted speculation that the US would respond through a military air strike.

The Dow Jones was the worst hit, shedding 4.45%, the S&P eased 3.13% whilst the Nasdaq recorded a decline of 1.01%. The Nikkei 225 and FTSE 100 also closed the month in the red, with declines of 2.04% and 3.14%, respectively.

Prospects of tapering by the Fed also affected performance of emerging and frontier markets. This is because some of the excess liquidity that was being pumped into stimulating growth in the US economy has been filtering through to emerging and frontier markets in search of higher returns. Tapering will therefore reduce flows to these markets and possibly spark some sell offs.

Coming back home, it was bloodbath on the Zimbabwe Stock Exchange (ZSE), with the mainstream industrial index shedding a solid 22%. This was the highest monthly decline the ZSE has recorded since the adoption of multiple currencies. Year to date gains that stood at 52.8% at the beginning of the month capped the month of August at 19.21%.

A total of US$1.28 billion was wiped off during the month as market capitalisation declined from US$6.04 billion to US$4.77 billion. Selling pressure, mainly from offshore investors, surfaced on the market on 05 August 2013 after the announcement of election results. Since the ‘Black Monday’ when the market erased 11% of its gains, direction has remained southbound, with only three days managing slight gains of 0.21%, 0.41% and 0.15% respectively.

Offshore investors have been selling off their positions mainly for two reasons: They feared that Zanu PF, which won the elections, would immediately reintroduce the Zimbabwe dollar and increase momentum in its implementation of business-unfriendly policies such as the Indigenisation and Economic Empowerment programme. Banking institutions also felt the pain as there was a run on deposits.

The bellweather stocks, namely OK Zimbabwe, BAT, Econet, Delta and Innscor that are mainly preferred by offshore investors, were the worst hit, recording losses ranging between 21.9% and 30%. Market breadth for the month was negative, with only 6 gainers, 49 decliners and 21 static counters.

Mid and small cap counters emerged the best performers for the month owing to the huge knocks recorded on the heavily capitalised counters. Phoenix, Art, ABCH, Falgold and Nicoz topped the performance tables with gains ranging from 2.6% to 50%. Turnover for the month rose by 27.3% to US$54.2 million. Worth noting is that 199.4 million Art shares, representing 40% of the company’s issued share capital, exchanged hands in the month in deals worth just above US$1 million.

Outlook for equity markets on the global markets will be determined by the decision the Fed will make with regards to tapering its QE operations. If the bank decides to slow down on its monthly bond purchase programme then markets are likely to remain weak. Pending economic reports, particularly the job market report for August, are likely to influence the decision the Fed will make. On the commodities front, the US response with regards to the geo – political instability in Syria will determine the direction the yellow metal will take. However, lately the price has been coming off after the US president disclosed that approval from congress will be sought first before any military action. Chances of a favourable vote from congress look slim after the US’s supporters in London failed to sway the House of Commons.

Locally, regaining investor confidence is key if the current hemorrhaging on the equities market is to stop. Whilst the Reserve Bank of Zimbabwe’s Governor Gideon Gono, as well as other senior officials from the winning Zanu PF party have tried to allay market fears, insisting that the use of multiple currencies will remain in place, sentiment in the market remains negative.

The stock market is still awash with sellers and the scenario is being compounded by poor performance being exhibited by listed companies. The June reporting season is mainly dominated by results from banks. As highlighted in this column last week, most of the institutions were affected by the coming into operation of the Memorandum of Understanding signed between the Reserve Bank of Zimbabwe and the Bankers Association of Zimbabwe.

Additionally, companies in other sectors also exhibited signs of strain as their revenues were either static or lower than those recorded in the prior year, due to tight liquidity in the business environment.

It appears that the downtrend on the equities market may continue unless the new government puts in place policies that are business-friendly to lure back foreign capital. Government should also respect property rights as this will give offshore investors confidence to put their money in the country again.

A framework that is consistent, realistic and which ensures continuity of business operations should be adopted in implementing the indigenisation and economic empowerment drive. Foreigners are key players in the economy in that they have the capacity to provide the necessary capital to recapitalise operations.