Share rally unstoppable: money does grow on trees!

By Lance Mambondiani

People would rather be promised a lottery ticket next week than get rich slowly – Warren Buffet

OVERVIEW

FORGET the old proverb that ‘money does not grow on trees’, on the ZSE, it does.

Since the market is now trading without a correlation to basic fundamentals, investment behaviour on the ZSE seems to be driven by behavioral finance than any real technical analysis.

Textbook portfolio management tells us that the best way of predicting the direction of the market is by looking at interest rates, inflation, GDP growth rate, Fiscal Reforms and performance of listed companies.

Quite simply, real life investors are not rational beings; they are driven by their emotions. There are few counters on the ZSE whose share prices are trading on what they are worth rather than what investors think they are worth. Back in the 1930s, economist John Maynard Keynes compared the stock market to a contest which was then popular in British tabloids, in which contestants has to look at photos and choose the faces that other contestants would pick as the prettiest.

Similarly, stock market analysts try to guess which stocks other traders are likely to buy. The successful punter is the one who predicts the ‘pretty’ before others claim a prize on it, buying on a low and profiting on the high. If the truth were told, anyone can make money in a bull run. A portfolio of stocks chosen by a chimpanzee at random would have performed no worse than those carefully chosen by ‘expert’ portfolio manager. Any serious investor who doesn’t see dollar signs in their eyelids when they look at the stock market right now has no chance buying and selling tomatoes profitably on a side road in Kuwadzana, Mbare or Sakubva market.

The Bull Run on the ZSE has been a ‘matter of defying the financial gods’, on a basic level, it has been possible to turn something that’s inherently unstable into an advantage. The current rally together with last week’s ‘steaming off’ is hardly unexpected. It depicts the self-reinforcing mechanism of the markets.

Although the fuel for the bull run remains the low interest rate policy and hyperinflation, the reason why share prices have been tripping over each other shows the way investors gain confidence from the confidence of others, regardless of whether it is justified or not. Investors and the market become bullish mostly because everyone else is bullish. It is also quite possible that the rush of the Zimbabwe Dollar, fleeing inflationary hegemony can create a colossal stock market ‘bubble’.

Although the ‘B’ word is hardly interesting reading for investors right now – it is unfortunately an inevitable reality of any rally. The beauty of a bubble is that it creates an overvaluation in the bubble sector and an undervaluation elsewhere. Although we don’t quite believe any other legitimate financial instrument can give investors better returns than the stock market at the moment, convincing investors to look elsewhere is expecting a miracle. So is the ZSE now more of a fantasy casino than a legitimate market? In a casino, a player is more likely to gamble themselves to poverty. On current ZSE statistics, an investor has more chances of hitting the jackpot than ever before.

STOCK MARKET UPDATE

The market was in a zigzag last week and investors were feared the worst. The industrial index only started showing signs of a rebound on Friday 19 October, closing the week 4.69 percent stronger at 179,641,650.23 amid several gains across the industrials. The move was engineered as usual by gains recorded in Old Mutual, PPC and BAT.

The mining index closed last week 2.28 percent firmer at 182,486,100.41. Investor, however used to abnormal gains can be unappreciative. The industrial index actually gained 9.34 percent last week, whilst the mining index rose a marginal 0.36 percent. The slowdown was due to the short position in the money markets which started a couple of weeks ago.

On Monday, the 22nd of October, the industrial index firmed 4.99 percent to close at 188,607,688.93 points whilst the mining index burst the roof, firming 10.81 percent to close at 202,217,324.15 points driven by RIOZIM which closed at Z$2800000 and Bindura which added Z$100000 to Z$900000.

TABLE 1: EQUITY MARKET INDICATORS

Indices	Week Ending 17th Oct 2007	Week ending 24th Oct 2007	Percent Change	YTD Move %
Industrial	168,426,220.91	257,553,354.84	52.92	45,095.58 %
Mining	171,081,826.81	289,023,575.62	68.94	70,513.56%
Average P/E
Industrial	189.43	180.09	-4.93
Mining	20.00	20.00	0.00

Source: Coronation Advisory

At the moment, momentum trading is driving the market. Herd behaviour has the effect of lifting investor optimism as investors seek to profit by jumping onto short-term market trends. By Tuesday, the market was again on the rampage, gaining an impressive 17.13 percent breaking the two hundred million-point mark to close at 220,922,688.85 points. The chief drivers as usual were PPC, Old Mutual, delta and Meikles.

The ‘elastic’ mining index was trading 22.53 percent higher at 247,772,453.14. The resource index, surging on the back of firming international metal prices is having a pulley effect on the main index. No analyst would have predicted that 5 mining counters on a sub index would be trading higher than 76 counters on the main industrial index. It defies logic. Markets however, always correct themselves in demand and supply dynamics. That correction will either be on the industrial index trading up or on the mining index adjusting downwards. Nonetheless, the week under review remained a delight to investors.

STOCK MARKET OUTLOOK

According to figures released by the central statistics office, annual inflation has soared to 7 982 percent in September gaining 1,389.3 percentage points on the August rate of 6,592.8 percent despite the price controls introduced four months ago. The stock market is hardly in turmoil, last week’s sluggish performance was more of a balloon losing steam than a bubble waiting to burst. There are no fundamentals suggesting the market will ease, at least for now.

Empirical findings suggest that in an efficient market stock market returns and the inflation rate have a negative relationship. Inflation has a huge impact on stock valuations. Lower inflation means higher price/earnings ratios and higher stock prices and higher inflation means lower price/earnings ratios and lower stock prices. The ZSE is contradicting theory; current trends have clearly indicated a positive rather than negative relationship between Inflation and stock market returns.

A London-based analyst once cynically observed that a bank in Zimbabwe with more than 200 employees could fail to match the profits made by a corner shop in London operated by Mr. and Mrs. Patel due to inflationary pressures. He may well have been right! So what then is the basis of our long-term optimism? With no balance of payments, much of the economic problems are because the economy is imploding, based on inward looking strategies within shrinking productivity levels. According to the IMF’s October 2007 World Economic Outlook, Africa’s protracted economic boom is set to accelerate from 6.1 percent in 2007 to 6.8 percent in 2008.

With the exception of Zimbabwe, Sub-Saharan Africa is enjoying one of the best periods of sustained growth since independence with low to moderate inflation rates. The economic problems in Zimbabwe are not likely to last forever. The wise are those who prospect ahead of any ‘gold rush’. The diaspora population may yet play a significant role in any of this metamorphosis.

A 2006 study by International Organisation for Migration (IOM) concludes that apart from economic remittances, nearly three quarters (73 percent) of respondents wanted to participate in a skills transfer programme whilst 77 percent wanted to contribute to the development of Zimbabwe. Until that reality unfolds, investors will continue to seek cover under inflation hedges provided by the stock market, the property market and forex markets. That’s is hardly being greedy, it is a matter of survival.

FOREX MARKET

For the first time this year, one United States Dollar was worth more than one million Zimbabwe dollars on the parallel market. The ZWD: GBP rate passed the psychological ZWD2 million dollar mark blowing wide open analysts predictions that the rate would close the year on that mark. Having closed last week at Z$1,500,000.00 to the pound, the dollar lost approximately 40 percent of its value on the parallel market to close this week at Z$2,100,000.00.

Sustained pressure is due to money supply growth, too much Zim dollar chasing scant currency reserves on the parallel market. Demand levels reflect an unusual mix of individual and corporate forex requirement, supporting a ‘total net importer’ economy induced by price control contractions. Other investors, once caught napping, are disinvesting from the dollar in anticipation of the new currency. The central bank announced in its monetary policy statement that it was to launch Operation Sunrise 2 to deal with the returning zeros.

The pressure on the Zimbabwe dollar, which has been falling at an average rate of 25.2 percent a week since the 28th of August 2007 is a worrying sign of enduring weaknesses in the exchange rate policy. In the absence of increased exports, creative alternatives will have to be considered. The importance of remittances as a strategic contributor to balance of payments requires revisiting.

FIGURE 1: AVERAGE REMITTANCES FROM UK & SA (USD)

Source: Adapted from IOM Report (2006)

In the IOM report referred to earlier, diaspora remittances reveal staggering significant statistics. On the respondents surveyed, 18 percent said they were remitting on average US$565 per month from the UK and South Africa, another 18 percent said they send between $377 and $563. Thirty-seven (37) percent were sending between $188 and $375 a month, while 27 percent remitted less than $188.

Previous research suggests that there are approximately 3.5 million Zimbabweans in the diaspora. Taking an average remittance of between $350 and $500 per month on a diaspora population of 1 million would yield an average monthly remittance of US$350 million to US$500 million per month, enough to fund critical supplies. The benefit of these remittances is lost through parallel market activities due to an unfavourable exchange rate regime. Forty seven (47) percent of the respondents in the IOM study wanted a better exchange rate to help them to contribute or contribute more effectively to development.

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INTERNATIONAL MARKETS

International markets gave investors a scare at the close of last week. On Friday, the S&P 500 fell 2.6% to 1,500. This was the worst one-day fall since the credit squeeze started in August 2007. In the UK, the market opened the week on Monday in a panic. The FTSE 100 fell sharply due to a cocktail of that dose of bad news from America, higher oil prices, a weaker dollar and troubled credit markets raising fears for a global recession. The FTSE 100 opened the week down 110, or 1.7 percent to 6421.6 with fears of the return of the infamous ‘Black Monday’ 20 years ago when the Dow Jones Industrial Index fell 22.6% in a single day. The fall is equivalent to more than 3,000 points today.

By mid-week sense and sensibility appears to have prevailed. Markets finished in positive territory - shares buoyed by the ongoing fall in crude oil prices and better-than-expected (so far) Q3 numbers out of the United States. In international markets a day can make all the difference. On the FTSE, Umbro surged 25.50 to 190.50 on Tuesday after NIKE confirmed that both parties had agreed on a recommended cash offer of 195p per Umbro share, including an interim dividend of 1.94p. The agreement values Umbro at approximately US$582 million. Fears of a US recession are expected to linger and the market is expected to remain unstable for some time.

Coronation Money – Weekly Tip

A bull market always results in a rush of money from rookie investors. Many will get burnt, catching the falling swords. Avoid the temptation of flicking a coin to pick your stocks, you will suffer in a correction. Exercise caution. For our diaspora investors we recommend that you follow the red flag causing the Bull Run, PPC, Old Mutual, Meikles and BAT are always good buys. If you have the cash to splash, mining counters can be considered. For investors in Zimbabwe think of Mid-tier and small cap counters, Tanganda, Turnall and Celsys even Zimpapers, they may surprise you. If in doubt, go for value, not fashion.

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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