Is ZSE bull run losing its steam?

By Lance Mambondiani

'Nothing will ever be attempted if all possible objections must first be overcome' – Samuel Johnson

OVERVIEW

The sustained bull run on the ZSE has got analysts, fund managers and economists confused.

Is the bull run due to an irrational exuberance or a show of confidence in listed companies? Are the rapidly rising share prices sufficient or necessary to stimulate economic growth? With the predictions of a financial apocalypse in Zimbabwe contrasted by a robust market, is the ZSE maximizing returns or minimizing loses? The true position lies somewhere in the middle. If investors are making their money, do they really care?

Forget the unremittingly miserable news, counter-intuitively, investors will continue to flock to this refreshing financial oasis, encouraged by superlative returns displaying no respect to Newton’s laws of gravity. Statistics show that approximately 90 percent of shares on the ZSE are held by large corporates. Individual investors blinded by a cocktail of socio-economic frustrations have only been spectators to the ‘crowns and jewels’ in their backyard.

Compare this to foreign markets; individual investors currently represent the majority of trades on the NASDAQ and over 60 percent of trades on the LSE. The biggest impediment for individuals in Zimbabwe is the erosion of disposable income. Zimbabweans in the diaspora who, for long thought there was no hope or benefit investing in Zimbabwe have only started to get curious about investing on the ZSE.

Whilst analysts who believe the bull run will continue clearly outnumber those who believe otherwise, such careless optimism is not difficult to explain. The proximate cause has always been the negative real rate of return on the bond market. Company prices are now far removed from fundamentals. Price movements are now less correlated to price-earning (PE) ratios.

In deciding which shares to buy, analysts use among other things PE ratios, which measures what one currently pays to buy a stock, relative to the future expected earnings from holding that stock. The PE ratios are then compared to similar companies to see if the stock is over-or underpriced. Such a selection method only works in an efficient market of which Zimbabwe is certainly not one.

oreign fund managers and our investors interested in the ZSE have been asking how it is possible that such returns unmatched anywhere else in the world can be achieved on such a small bourse surrounded by a crumbling economic structure. The explanation obviously lies within that market imperfection.

In an ‘efficient’ market (where current share prices factor in all publicly available information), it is not possible to consistently beat the market unless you a beneficiary of insider trading or had invested in a mutual fund. The advantage of the ZSE is exactly what surrounds it. The stock market is probably the only remaining ‘free market’ operating within a controlled economic environment. Price distortions and misallocations are bound to be obvious.

STOCK MARKET UPDATE

The stock market ended last week with a profit contraction, constipated by investors revaluing their portfolios after huge gains. The main index closed last week on a recovery path firming a marginal 0.02% to close the week at 164,293,116.37 points propelled by defensive currency hedge counter PPC which surged Z$200000 to Z$3800000. TA, FML and Meikles also put up significant gains. On the baseline, the direction of the ZSE appears fundamentally easy to determine.

A few heavily capitalised top tier counters are at the vortex of any upswing. The prices of these shares are mostly prohibitive for ordinary investor, the shares in circulation are also tightly held by a few institutional investors. A bull run can be easy to manufacture, induced demand on a few counters can cause a rally or a tailspin.

Although sluggish, the main index opened the week on a recovery path gaining 0.48 percent to close at 165,083,546.89 points spurred again by PPC, ABCH and Old Mutual. The mining index retreated 1.11% to close at 179,815,800.75 points. Tuesday trading was equally subdued gaining a marginal 0.21 percent with the mining index retreating a further 4.19 percent. The pattern of marginal gains, a result of earlier profit taking repeated throughout the week, is likely to influence further selling pressure with timid investors uncertain on whether the ‘good times’ will continue to roll.

TABLE 1: FINANCIAL INDICES

Indices	Week From 9 Oct 2007	Week to 16 Oct 2007	Percentage Change
Industrial	155,185,449.06	165,427,315.02	-7,67
Mining	186,610,246.20	172,283,067.09	6,59
Average p/e
Industrial	204.86	187.10	-8,67
Mining	100.00	20.00	-80,00

Source: Coronation Advisory

STOCK MARKET OUTLOOK

For investors, the best thing about trading on the ZSE is that the market is genuinely uncorrelated to the rest of the world. It has continued to rally without any respect for the sub-prime market credit crunch, the Fed’s cutting of interest rates and the Northern Rock crisis in the United Kingdom.

The main industrial index yield to date is approaching 25 000 percent and is set to breach the 200,000,000.00 point mark before the end of the year. The mining index has given investors returns of close to 45 000 percent since January 2007 and within touching distance of that landmark, all within our lifetime.

Coronation Top Picks Defensive Picks
FML Old Mutual
CFX PPC
NMB Econet
Willdale
Interfresh

Are the recent marginal gains evidence that the bull run is out of steam? Perhaps not, with the money supply growth expected to rise above 150000 percent by year-end due to pressure from quasi-fiscal spending, inflation figures will be difficult to control providing further impetus to the stock market. Although our predictions are that the rally will most likely continue until the end of the year, investors are encouraged to seek an opportunity to revalue their portfolios. Downturns will be inevitable, serious players who want to invest in and benefit from stock market investments will need a new method of picking up undervalued stocks where you don’t have to be worried by the short term ups and downs.

COMPANY NEWS

ZABG’s Treasury Chief resigns – The Zimbabwe Allied Banking Group’s head of treasury, Andy Hodges resigned last week from the bank. Reports in the Zimbabwe Independent suggest his resignation was linked to the discovery of a questionable foreign currency transaction. Hodges is the third high profile bank executive to resign after Exodus Makumbe the CEO of Premier and Dr David Hatendi of NMB. The resignations of Makumbe and Hatendi, who both made monumental contributions to the banking sector in Zimbabwe, have been linked directly or indirectly to the correction orders issued by the central bank. The third corrective order is believed to have been issued to one of the country’s leading building society.

The resignations may indicate recurrent corporate governance weaknesses in the financial sector which was blamed for the 2003-banking crisis. To its credit, the RBZ has increased its supervision and surveillance of the sector to avoid a relapse. Compared to its peers in the region, Zimbabwean banks are still off the mark

A recent survey on Africa’s Top 100 Banks has no Zimbabwean bank listed. Two years ago, Zimbabwe had four banks in the top 100, Barclays (Zimbabwe) was ranked 24th, Standard Chartered (50th), NMB (52nd) and CBZ (83rd). The ranking shows a decline in Tier 1 banks based on Capital, Assets and Profits. However, the country’s hyperinflationary environment may be a significant factor in the poor ratings.

FOREX MARKET

The parallel market in foreign currency is one of the country’s worst kept secrets. It is believed this market accounts for approximately 90 percent of funding receipts for the private and public sector. The open secret is that whilst the de jure classification of the publicly stated commitment of the central bank remains at Z$30,000, the de facto or observed parallel behaviour based on an indexed Old Mutual Implied Rate is trading almost 4 900 percent higher.

The ZWD: GBP rate on a rally since June continued to trade higher this week. After closing last week between Z$1,300,000.00 to Z$1,350,000.00, the ZWD shed 15.38 percent to trade at Z$1,505,000.00. Dealers were picking up the US$ in Harare and in the United Kingdom at approximately Z$750,000.00 with the South African Rand fetching Z$100,000.00. In September, the Zim dollar lost a record 151.39 percent of its value on the parallel market and has so far lost 65.75 percent in the month of October.

FIGURE 1: Old Mutual Implied Rates (OMIR) : June to Oct 2007

Source: Coronation Advisory

Going forward, rates are expected to move by between 8-10 percent every week closing the year beyond the £1: Z$2million region unless the RBZ slashes more zeros or introduces a new currency within Q4 as announced. Pressure on the dollar will most likely come from the country’s requirements for fuel and electricity. Zesa recently told a Parliamentary Portfolio Committee that it owed regional power companies US$42 million. The parastatal, which last settled its account in March 2007, is now at risk of being switched off by its neighbours.

Do you want to know more about how the Stock Market works, Never Invested on the stock market before? Send us an e-mail to receive a FREE copy of our Investor education series, STOCK MARKET FOR DUMMIES: THE BEGINNER’S GUIDE. The guide explains what a stock market is and how to make money from it. It also defines common terms used by analysts when describing the stock market.

INTERNATIONAL MARKETS

With international markets on a ‘limp’ emerging markets and African markets in particular are looking brighter. Although headlines remain perennially negative, economic fundamentals have been improving. GDP forecasts across Africa have risen fast to 6.8% this year, with the exception of Zimbabwe. This is largely attributed to increased trade in commodities, with China being a critical player. Sino-African trade reached $55.5 billion (27.4 billion pounds) in 2006.

The FTSE 100 hit a new seven year high on Monday rising to 6,750.3 and now approaching the all time high of 6,950, reached in December 1999 at the height of the dot.com and pre millenium bubble. Share price for oil giant British Petroleum (BP) was up 2.3pc to 633.5pc with investors and analysts being impressed by the Chief executive, Tony Hayward’s three year turnaround plan.

The oil sector as a whole was also boosted by rising oil prices, with US crude setting a new record rising 1.18 percent to $84.22 a barrel. The FTSE 100 was however again in a tailspin the rest of the week falling 30.20 to 6614.30 on Tuesday 16 October. Banks led the shares retreat as trades mirrored sell off in Asia reflecting renewed credit fears as Citigroup issued a sullen trading outlook

The JSE, previosuly lifted by metal prices at the beginning of the week traded weaker mid week closing 0.42 percent lower on Tuesday on the Citibank news and comments by the US Federal Reserve chairman Ben Bernanke to be caustious in the housing market. The movement in metal prices greater than the movement in the Rand is expected to propo renewed fears of a US meltdown.

Coronation Money – Weekly Tip

The Basic premise of Warren Buffet’s investing style is buying something for less than it’s actually worth. Although this sounds simple, finding these stocks can prove to be difficult. Investors however need to avoid making a mistake between a company that is undervalued because nobody has spotted its opportunity and one that’s simply a dog.

Another way to invest on value is to identify a company that’s subject to takeover rumours or shareholder posturing. In this case someone would have done research on the fundamentals. Investors can benefit from the underlying corporate transactions. The share prices for Kingdom, CFX, NMB, Celsys have recently adjusted more than 100 percent on the basis of similar deals.

Lance Mambondiani is a Director of Coronation Financial Holdings, a financial advisory company registered in the UK. He can be contacted at coronation.uk@btinternet.com or on +44 790 329 3227
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The foregoing has been prepared solely for information purposes only based on independent research by Coronation, no representation or warranty; express or implied is made to its accuracy or completeness. Coronation therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. To discuss any of these investment options in detail please contact Coronation Financial Plc. Reg No. 06342947.

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