‘Stock market responding to socio-political events’

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The plunge in equities triggered by a military intervention last week has seen market capitalisation give up almost US$6 billion inside a week with further weakening expected in the next few days. Zimbabwe Independent business reporter Melody Chikono (MC) caught up with the Zimbabwe Stock Exchange (ZSE) acting chief executive Martin Matanda (MM, pictured). Below are excerpts of the interview:

MC: The ZSE lost in excess of US$5 billion in one week as investors panicked following the intervention of the army in the political affairs of the ruling party. Do you think the dipping of the market could be signalling the end of a bull run which began in the quarter to June?

MM: The magnitude of the fall seems to be in line with the materiality of the political events of the past week and also signals the end of the recent bull run. The bull run had to end at some point, normally precipitated by profit-taking, but in this case the end was triggered by the political developments. This does not mean, however, that there is no potential for another bull run to start.

MC: What other impact did the political developments have on the stock market in the past week?

MM: Turnover has also dipped over the period, signalling weakening demand for stocks. In view of the nature of the political developments, we can also assume that investors are taking a cautious approach as they digest the unfolding events.

MC: Do you foresee future losses if the situation remains unchanged or persists?

MM: The downward movement is expected to continue as investors, who are already holding securities, try to cash in before the prices weaken further.

On the other hand, buyers will try to hold out until prices weaken further, thereby creating even more downward pressure on prices.

MC: How do you see this current situation affecting ongoing efforts to attract investors?

MM: Bull runs and bear conditions are not permanent market conditions. These are short-term cycles and are normal in stock markets. The volatility actually helps the market to attract those investors looking for capital gains which would not be possible in zero volatility conditions.

MC: Do you believe that some stocks were overvalued and are now returning to equilibrium?

MM: Investors are the best evaluators of whether stocks are over or under-priced. This is then reflected through the buying and selling activity.

MC: Is there a possibility of a positive outcome arising out of this market crash, considering that there have been inflationary fears in line with the bull run?

MM: As you rightly point out, inflationary fears partly contributed to the upward surge in prices. The question to be asked is whether those expectations have changed and why. Again the stock market will just adjust to reflect the new expectations.

MC: Do you see the market self-correcting or adjusting in the long run?

MM: Markets always self-correct, that is the epitome of efficient markets. New information, new events and new expectations should be reflected in stock prices. If that does not happen then the “visible hand” will intervene and that will not be good for the markets.

MC: What has been the impact of the liquidity crunch and cash crisis in general on the stock market?

MM: You have to be specific on what you mean by liquidity crunch. With regards to cash shortages, that has no direct bearing on the stock exchange as stock buyers do not use cash. Indirectly, however, investors who have been unable to withdraw or remit their funds from local banks have used the bank balances to purchase stocks and that partly contributed to the bull run.

MC: What initiatives are the ZSE putting in place to ensure that investors’ funds are secure?

MM: It is important to realise that stock market investments are risky and investors who participate are fully aware of the risk. Stock prices are never guaranteed to remain up or to only go up without going down, be it in Zimbabwe or anywhere else in the world. The safety of investors’ funds lies with the banks while the safety of the capital markets lies in the Securities and Exchange Act of Zimbabwe which governs the market and its operators.

MC: What is your comment on the general performance of the stock market in Zimbabwe?

MM: The stock market performance in Zimbabwe reflects the ongoing socio-political and economic developments. Investments are driven by available information and how investors interpret that information.

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