FY07 and investment lessons from ‘Black Friday’

By Lance Mambondiani

" If hard work were such a wonderful thing, surely the rich would have kept it all to themselves"– Lane Kirkland

OVERVIEW

THE 14th of November 2007 will mark the 10th anniversary of a day of terrifying economic nightmares for Zimbabwean citizens. Zimbabwe’s economic crisis is often traced back to November 14, 1997, a day analysts referred to as ‘Black Friday’, when the Zimbabwe dollar lost 71.5 percent of its value against the US Dollar.

The stock market subsequently crashed, wiping away 46 percent from the value of shares as investors scrambled out of the Zimbabwe Dollar. Debates are inconclusive on the real cause of Black Friday.

Depending on who is doing the analysis, the crash is attributed to a number of factors such as government policies (Gopinant, 1998). The failure of the IMF’s structural adjustment programmes (SAPs) has also been cited as possible contributory cause (Mambondiani, 2006). Some studies have concluded that the crisis was mainly driven by controversial government policies ranging from unbudgeted expenditure on war veterans, to the controversial land reform and involvement in an unbudgeted regional warfare in the DRC (Moore, 2003).

Whatever the cause, the economy has failed to recover from this collapse with all macroeconomic indicators worsening. Annual Inflation in 1997 was averaging 25 percent. The previous year, GDP growth rate had averaged 8 percent in 1996. It all seems like a story from ‘a long time ago, in a far away country’. Compare that to current inflation at 7 982 percent and negative growth rates going back many years.

The Zimbabwean version of ‘Black Friday’ was probably named after the Wall Street stock market crash of 1929. On Thursday, October 24, 1929, stock prices fell on that day and continued to fall for a full month. Prices dropped precipitously as more and more investors tried to sell their holdings. By end of the day, the New York Stock Exchange had lost US$4 billion dollars. By the following Monday, the realisation of what had happened began to sink in, and a full-blown panic ensued. Thousands of investors scrambled to sell off their shares. Many were financially ruined. By the end of the year, stock values had dropped by fifteen billion dollars. Markets can suffer a splutter in a single moment.

Zimbabwean markets have an inexplicable history of internal shock absorbing mechanisms. Companies have been holding on amidst deteriorating macroeconomic conditions, policy gyrations and international isolation. Price controls introduced on the 25th of June 2007 caused the market to go on a nosedive with 62 percent of the counters trading in the red on the day due to panic induced selling.

After a ten-year recession, lessons have been few and choices limited. The selling mood triggered by the government’s directive to manufacturers, wholesalers and retailers to slash prices by 50 percent resulted in the industrial index retreating by 17.3 percent as the market fell to a 23 day low on the back of increased selling pressure. Even within this economic contraction, the stock market has broken records not achieved during periods of the country’s sustained economic growth.

The current price war has seen most businesses booking losses and others recording squeezed gross margins of below 10 percent, compared to monthly inflation which averaging 40 percent. Businesses are therefore faced with reduced revenues without a corresponding reduction in cost structures.

The shops may still be empty but the market has since forgotten the devastating impacts of black Thursday and the price controls introduced 10 years later. Black Friday changed the Zimbabwean financial landscape, influencing economic directions for more than a decade. It is worth a minute of silence at least on the Zimbabwe Stock Exchange.

STOCK MARKET UPDATE

As we approach the end of the 2007 financial year (FY07), investors will be looking at the year on the stock market as one of the most profitable in a long while. The real danger of a bull run is compromised risk strategies by investors. Does it matter to look at risk, when the market is doing so well? The starting premise of financial markets returns and the standard approach to risk is that they are normally distributed which makes it inevitable that a decline will follow a boom. But ‘bell curves’ or normal distributions in which most results are in the middle and extremes are rare in a static environment.

Unlike such normal distributions, ZSE returns have no meaningful average than can be assumed to represent the typical feature of the distribution and no finite standard deviation upon which to base confidence intervals. This may explains why companies and ordinary investors are flocking to the stock exchange on the basis of inflation and monetary expansion forecasts alone. Compared to other investment options, the stock market has surprised many, outperforming returns on the property market and the foreign currency market.

One of my erudite colleagues, Nhlanhla Nyathi, a financial analyst writing for the Independent last week, suggested that it was doubtful that the stock market could outperform the parallel market due to the devastating impact of price controls. Our comparative analysis of returns on inflation hedge investment options suggest otherwise.

TABLE 1: YTD INVESTMENT OPTIONS PERFOMANCE FY07

Investment Option	January 07	October 2007	YTD %
Stock Exchange
Industrial Index	-	287,380,621.19	51 136.57%
Mining Index	-	293,393,901.27	76 393.87%
Property Market	-	-	42 000.00%
Foreign Currency Market (USD)	Z$4, 143	Z$1,210,526	32 551.90 %

Source: Coronation Advisory.

Since January 2007, the parallel rate has appreciated 32 551.90 percent whilst returns on the Industrial Index have reached 51 136.57 percent. Barring a major crash, the Zimbabwe Stock Exchange will close FY07 as the best performing investment option regardless of price controls or the legality of the parallel market rates.

The Bull Run continued on the ZSE with the markets rewriting history. The industrial index closed last week buoyant gaining 59.97 percent, pushing the index to a record 287,380,621.19 points. The mining index gained 60.78 percent to close the week at 293,393,901.27 points. The market may be nearing strong resistance levels ahead of year-end. Investors are advised to be cautious going forward and book profits on the rise

Historically, the market always slows down nearing December as fund managers start to collect their commissions. The rally will however most likely continue until December. Both the industrial and the mining index have been spluttering this week compared to previous gains, up 1.60 percent and 7.07 percent on Monday and 2.17 percent and 0.71 percent respectively on Tuesday. The pattern of marginal gains will be repeated for the rest of the week. To an investor ‘in the money’ it hardly matters that the market is sluggish, as long as it is still pointing up. Telling investors that it is time to sell off will always fall on deaf ears.

The mining index has broken through the 300,000,000.00 point mark and the industrial index seems certain to break through as well before the end of the week. Times are certainly good on the ZSE. Returns have certainly deviated from the norm investors need to absorb this rarity while it lasts.

TABLE 2: EQUITY MARKET INDICATORS

Indices	Week Ending 24th Oct 2007	Week ending 31st Oct 2007	Percent Change	YTD Move %
Industrial	257,553,354.84	298,303,268.70	15.82	51,136.57%
Mining	289,023,575.62	316,370,637.94	9.41	76,393.87%
Average P/E
Industrial	180.09	188.51	4.68	-
Mining	20.00	20.00	0.00	-

Source: Coronation Advisory

STOCK MARKET OUTLOOK

Within a rally, it is easy to forget that there are some investors who are still holding on to non-performing mid-tier counters such as Truworths with a yield to date (YTD) of 2 948 percent, OK (5 614 percent), Powerspeed (9 900 percent) and Chemco (7 757.1 percent). Some of these underpowered counters would have been affected by the price control policies introduced mid year. The retail sector was the most affected.

The impact of price controls is still enduring, evidenced by poor stock levels in retail shops such as Truworths, Number One stores, CW stores and Nyore Nyore all of which are themselves subsidiaries of listed retail counters. Investors need to distinguish between retails counters that are perennial underachievers (dogs) from those that are undervalued but with strong fundamentals.

Whatever the reasons for the poor performance, investors often have sympathy only to their pockets. If your investment has failed to hedge you against inflation consider cutting your losses and move on. If the share price of a counter has not been influenced to rise by contagion effect of a Bull Run affecting the market for more than three months it is unlikely the share price will perform any spectacular acrobatics in the future. Consider our exit strategy in the Coronation weekly tips below. Investors must ‘buy when pessimism is at its maximum and sell when optimism is at its maximum’.

To receive a list of Coronation’s Top 5 Stock picks for the remainder of the year, e-mail us on info@coronationfinancial.comor or text us on +44 790 329 3227 providing your full name and e-mail address.

FOREX MARKET

The Zimbabwean dollar remains under sustained pressure on the parallel market. The ZWD: GBP rate edged 9.52 percent higher this week, trading at an average of Z$2,300,000.00 Dealers were picking up the US$ in Harare and in the United Kingdom at approximately Z$1,200,000.00 with the South African Rand being in high demand reflecting increased regional imports due to price control induced shortages.

FIGURE 1: OLD MUTUAL IMPLIED RATES 2 NOVEMBER 07

Source: Coronation Advisory

In October 2007, the Zimbabwe Dollar lost 154.14 percent of its value in a major slump which started in June wherein the currency was down 218. 23 percent. Our analysts previously predicted that the Zimbabwe Dollar would close the year battered, struggling to find a bottom on the other side of Z$2 million.

Current trends in which rates have accelerated have proved our predictions wrong. Our revised forecasts based on a weekly average depreciation of 15 percent per week suggest that the dollar may weaken beyond the Z$3,000,000.00 point mark to the pound by year-end. The Governor may however change this superficially by introducing a new currency or by slashing the stubborn zeros.

Coronation Money – Weekly Tips: How to sell gracefully during a Bull Run

1. Set up price triggers – Set up an exit price. Most brokers allow you to set a price at which you can sell your shares. Once the price is reached you know you are going to exit regardless of the temptation to stay.

2. Top Slicing – In this strategy you sell off a portion of your stake at a time. The strategy may not be economic if you have a small shareholding. However, having taken partial profits allows you to be insulated against risk and be more sanguine about holding the rest of your shares.

3. Initial stake removal – This is related to the above strategy. Sell off a portion of your shares to cover your entire investment, your subsequent progress will thereafter be based on free capital and you can hold your investment for as long as you like.

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
_____________________
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.

JOIN THE DEBATE ON THIS ARTICLE ON THE NEWZIMBABWE.COM FORUMS
newsdesk@newzimbabwe.com