Markets defy the odds in October

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Investors in the US brushed aside the US government shutdown as the Dow Jones powered a 2,75% monthly gain in October while the S&P 500 recorded an even higher return of 4,46%. In London, the FTSE was up 4,17% while in Japan a solid 7,54% gain was recorded.

Kumbirai Makwembere

US markets in particular defied the odds by logging record highs in the month in which some government operations were suspended after Democrats and Republicans failed to agree on rules and policies that would govern spending going forward.

Of the total federal government workforce of 2,8 million, 800 000 were temporarily sent home with 1,3 million employees continuing working while risking not getting paid. The main bone of contention was the Patient Protection and Affordable Care Act commonly known as Obama care.

The standoff lasted for 16 days with Congress finally settling for a temporary solution of funding government operations until January 15, 2014 as well as raising the debt ceiling until February 7, 2014.

It is believed that the world’s largest economy lost US$24 billion over the period. Gold prices firmed afterwards as weak economic readings released thereafter showed signs of weakness thereby inducing an appetite for safe haven assets.

Coming back home, October was another buoyant month for punters on the local bourse as the market advanced a further 4,84%.
Cumulatively, the market put on 15,45% in the past two months as it continues to recover from the bloodbath recorded in August.

This was after investors panicked after the announcement of election results. Year to date the mainstream index remains in the black with a hefty gain of 37,62%. Market performance benefitted from the recovery in bell weather counters that had been over-punished and appeared cheap when compared with peers in the region. Delta recouped 8,87%, Old Mutual rose 8,42% and BAT advanced 4,26%.

Offshore investors continued to cherry-pick companies with strong defensive fundamentals.

It is, however, the mid and small caps that topped the performance tables for the month. Padenga was the best mover with a gain of 57,9%. Star Africa, Dawn, Masimba and African Sun closed the top five spots with gains ranging from 50% to 33,81%. Sentiment for the sugar refiner remains positive on news that the company is in the process of installing a new plant that will both double production volumes to 600 tonnes per day and improve operational efficiencies.

Strong performance of Dawn and African Sun might be attributable to the ongoing series of transactions involving Brainworks Capital.

The latter bought the 12% shareholding in Dawn Properties that was previously held by African Sun. Simultaneously, an African Sun executive exchanged his 30% stake for a 17,04% shareholding in the private equity firm. So effectively, Brainworks Capital now holds a stake in both African Sun Limited and Dawn Properties.

What, however, continues to boggle the market is why the ZSE has suddenly firmed? Have the factors that initially dragged down the market improved?

And the biggest question of all is: will this upward trend hold for the remainder of the year as we head into the home stretch? A possible explanation for the positive trend is that investors’ fears over the possible reintroduction of the Zimbabwean dollar declined due to numerous reassurances to the contrary from the authorities.

Furthermore, offshore money might be getting comfort from statements by the Ministry of Youth, Indigenisation and Economic Empowerment that point towards a softer approach in implementation of the country’s empowerment laws.

However, it would appear that the upward momentum might be short-lived as other conditions that are fundamental to the performance of the equities market remain unfavorable.

Liquidity remains tight and evidence on the ground shows that companies are under severe strain.

Media reports allege that nine companies were liquidated between September and October while twelve were placed under judicial management. The manufacturing sector survey compiled by the Confederation of Zimbabwe Industries (CZI) also disclosed that capacity utilisation in the productive industry declined to 39,4% from 44,6%.
To sum it up, the slowdown in the economy is weighing negatively on the performance of companies. The financial results released over the past quarter were also disappointing with most companies reporting flat earnings or numbers below the previous year’s level.

Companies are highly geared and the fall in product demand due to tight liquidity conditions and stiff competition from imports has not helped the situation.

It would seem that the market continues to defy logic as it has maintained an upward trend when key economic fundamentals suggested otherwise.

One would expect the slowdown in both the economy and company performances to drag down stock prices.

The absence of concrete policy pronouncements since election day back in July is again another negative factor for stock market performance. Going forward, the market is likely to trade sideways for the remainder of the year getting support from those selected counters that are performing well.

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