Stock Market rebounds after profit taking

By Lance Mambondiani

OVERVIEW

THE Zimbabwe Stock Exchange is a phenomenon, often attracting mixed sentiments. The movement of the industrial index this year has been seismic, registering on local and international financial radars. The current Bull Run is arguably the longest on record and by far the most rewarding.

The danger in a bull run is that investors become bored due to ‘serial optimism’. It is particularly difficult to stay focused when there are no signs of the market steaming off. For fear of becoming mundane, analysts will try and ‘heat the leftovers to make them look more appetising’.

Since July 2007, we have been talking about the Bull Run and how to benefit from it. We have convinced customers that it is not a bad idea after all to look at Zimbabwe as an investment destination.

Even with phenomenal gains under record, there are still some investors who remain unconvinced. Although the majority of investors would find the words profitable and Zimbabwe to be oxymoronic, recent figures on the performance of the stock market in US dollar terms may provide comfort to cynicisms. A stable Zimbabwe can pull more investors than South Africa.

Although there is clearly an increased interest in investing on the stock market, the performance of portfolios in hard currency is not the only reason why new investors are not rushing to the ZSE despite recent performance. Research conducted by Coronation Advisory Services on 200 ZSE adult investors revealed that the biggest deterrent to potential investors is actually a lack of knowledge and understanding on how the stock market works rather than the risk factor.

Affordability was the most common reason for not having any stock market exposure (47 percent), while 32 percent said they were not confident enough to invest on the stock market due to lack of understanding. Twenty-four percent stated they were worried about the rate of inflation in Zimbabwe. Women were more cautious than men in terms of stock market exposure. Of those considering investing in the stock market for the first time, more than 82 percent of men appeared keen compared with 18 percent of women.

For the greater part, stock markets have been mystified as a preserve of blue collared graduates with MBA’s and Finance degrees. Nothing can be further from the truth. Most of the deterrents to investing on the market are due to lack of relevant information allowing investors to make informed decisions without ‘clucking’ around.

The essential skills needed to trade on the stock market are basic, a desire for empowerment, patience and the ability to count to 10. Figures don’t often lie; it is possible to make a handsome return on the stock market. It is also quite possible to buy into counters that provide you with a hedge against currency fluctuations.

STOCK MARKET UPDATE

When trading shares, many people fall victim to human nature often falling within patterns of psychological pitfalls oscillating between linear perception, group think and what has been referred to as the messenger syndrome. The patterns on the ZSE show potentially volcanic herd behaviour with investors trading in groups. Remember that all paper profit comes with a price.

Whilst the market has clearly been on a rebound this week, the ZSE remains a market where quality and caution should be core to your investment planning. In the last two weeks, we advised investors that the nature of the run suggests that profit taking was inevitable. The challenge, however, is what to do with the profits once you have taken them. Your guess is as good as mine; my short answer is ‘buy more shares on the cheap’.

The main industrial index closed last week down 1.72 percent at 538,968,036.79 points on Friday November 9 due to widespread profit taking across most of the counters. Doomsayers and latecomers love it when the market is in the red. It’s a gracious opportunity for them to say ‘I told you so’. That moment, however, is not now.

As share prices start to overheat during a bull run, profit-taking cycles provide an opportunity to pick up shares on the dip. The market opened this week upbeat, cheered by investors pouring in money on shares.

The industrial index was up 3.06 percent on Monday to close at 555,437,684.52 points spurred by gains in PPC up Z$1 000 000 to Z$18 000000, Old Mutual added Z$500 000 to close at Z$9 000 000. The mining index also opened the week on a rebound adding 5.64 percent on Monday to close at 705,333,631.86 points.

By Tuesday, the market had gone back to its record breaking routine, with the industrial index adding on 2.14 percent, whilst the mining index surged 2.58 percent to close at 723,544,418.94 points.

TABLE 1: EQUITY MARKET INDICATORS

Indices	Week Ending 6 Nov 2007	Week ending 13 Nov 2007	Percent Change	YTD Move %
Industrial	620,789,787.66	567,342,081.48	-8.61	99,457.44
Mining	847,161,068.03	723,544,418.94	-14.59	176,674.67
Average P/E
Industrial	229.27	251.51	9.60	-
Mining	20.00	20.00	0.00	-

Source: Coronation Advisory

Week on week, the industrial index actually retreated (8.61) percent in the week under review whilst the mining index also shrunk (14.59) percent. The current rally makes us forget that the industrial index had actually reached 620,789,787.66 points last week, whilst the mining index peaked at 847,161,068.03 points.

The movements in both the industrial and mining index presents an indexing problem for Stock Exchange authorities. The Quadrillion-dollar market with the main index bursting through 500,000,000.00 points and the mining index at 723,544,418.94 points is incomprehensible to investors from the west unfamiliar with incredulous numbers. As the index approaches the nine-figure configuration, ZSE computations will become increasingly problematic. The expansionary index reflects the hyperinflationary conditions in which the market operates. Whilst the capitalization of the market is now innumerable, at least to the ordinary calculator, there is an urgent need for the ZSE authorities to consider a re-indexing exercise to bring the point system in alignment with other exchanges in the region.

STOCK MARKET OUTLOOK

Going forward, we see no fundamentals likely to cause a slowdown in current market trends. Predictably, the market is on an autopilot at least until the end of the year. The big question remains whether the returns on the stock market are good for money in US$ terms? An analysis by Kingdom Stockbrokers last week on the performance of stock prices in US$ between January and October 2007 suggested that most counters experienced negative growth, losing value in US$ terms during the period under review despite huge increases in share prices showing that in real terms ‘shares have not grown as portrayed by some quarters’. Whilst this may well be the case with some counters, that conclusion is not supported by the figures.

Firstly, average performance of share prices is better observed from changes in the indexes which represents the broad movement of a basket of shares, rather than individual share prices. Secondly, the generalized position fails to take into consideration the inherent weakness in the Old Mutual implied rate as a measure of parity.

In an imperfect market, even the OMIR proxy has been trading at huge premiums to parallel market rates on the ground providing huge distortions. Lastly, since the Zimbabwean share market is largely inward looking based on approximately 80 percent local investment in an economy imploding due to balance of payment contractions, it is particularly difficult to yardstick the market using the US dollar. It’s like comparing oranges to lemons expecting a similarity simply because they are both citrus. Positional objectivity demands that the performance of the market be benchmarked on internal parameters and compared to US$ for ‘rain coat’ purposes only and not as a measure of performance.

TABLE 2: ZSE US$ MARKET CAPITALISATION

Index	Market Cap US$ Value 02-Jan-07	Market Cap US$ Value 31-Oct-07	Percentage Change
Industrial Index	2,348,925,880.14	2,630,524,464.20	12 %
Mining Index	213,678,415.60	317,796,629.41	49%
Total Mrkt Cap	2,562,604,295.74	2,956,166,084.51	15%

Adapted from Kingdom

Despite these inherent complexities, even the comparative analysis shows encouraging signs. In US$ terms, the industrial index shows a 12 percent gain in market capitalisation, whilst the mining index is up 49 percent. The total market capitalisation between the periods under review shows a 15 percent increase, despite policy gyrations, hyperinflation and predominantly localized investments.

The fact that a number of counters show negative growth in US$ terms becomes a matter for portfolio selection and diversification. Investors seeking a currency hedge know where to find them. The Old Mutual share price is up 19 percent in US$ value, whilst PPC is down 93 percent. Most mining counters have put in significant gains in dollar terms Bindura (109 percent), RioZim (-13 percent), Hwange (122 percent) and Falgold (299 percent). In local currency, there is no doubt that the market has adjusted significantly bringing glory to many investors.

So the year is almost over, the stock market will start to slowly cool off ahead of the festive season, trading in short cycles punctuated by profit taking. There are a couple of counters we recommend to our investors as the last picks for FY07. In the next two weeks, we recommend Kingdom, Meikles and FBCH as our top picks.

After the 4 way merger of Kingdom, Meikles, Tanganda and Cotton Printers, the emerging entity, Kingdom Meikles Africa Limited (KMAL) with Nigel Chanakira as CEO will start trading on the ZSE on the 26th of November 2007, with a secondary listing on the LSE. The company will become one of the biggest companies on the ZSE in terms of market capitalisation. Kingdom shares will be consolidated at a ratio of 17,67 for every 100 Kingdom shares, meaning for every 100 Kingdom shares owned, investors will be issued with 17,67 Meikles Africa shares. This represents a highly discounted weighted average ratio that is likely to benefit customers holding Kingdom shares. Buy before the consolidation.

Arbitrage Opportunities

The mispricing of shares on the Zimbabwe Stock Exchange creates several arbitrage opportunities for investors exposed to more than one market. An arbitrage opportunity is ‘an opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price. A simple example is if you buy an asset for $10, then you turn around and sell it for $20 and make $10 for identifying the opportunity. The $10 represents my arbitrage profit.

There are a number of arbitrage opportunities on the ZSE. The Old Mutual share price is an example. Old Mutual is listed on the ZSE, JSE and the London Stock Exchange. The old mutual share is fully fungible, meaning you can buy it on the LSE and transfer it to the ZSE or the JSE without any limitation. The shares however cannot be transferred from the ZSE to the LSE due to exchange control restrictions.

The current Old Mutual price on the LSE is £167.20 a share, at the current, parallel market rate of 1£: Z$3,600,000.00, the London price translates to Z$6,012,000.00 plus charges. Compare that with the Old Mutual price on the ZSE at Z$9,000,000.00. Buying Old Mutual shares on the LSE and transferring them to the ZSE creates an immediate arbitrage profit of approximately 35 percent or Z$3 million dollars per share. Food for thought! If you are building in Zimbabwe and want to send £5000 why not consider transferring Old Mutual shares.

This route eliminates money transfer bottlenecks, gives you access to a legitimate form of transfer and an immediate 35 percent gain on the landed price on the ZSE. Remember the writer’s favourite maxim, ‘its not how hard you work, or how many shifts you are able to pin down, its how smart you are in structuring and bleeding your money for every value you can get’.

INTERNATIONAL MARKETS

Inflation in the United Kingdom surged above the Bank of England’s (BoE) 2 percent target. The Consumer Price Index (CPI) rose from 1.8 percent to 2.1 percent. The increase was driven largely by higher petrol prices and an unusual increase in school fees. Petrol Prices rose by an average of 2.7p a litre in October. The price is still expected to rise further in the coming months due to a rise in crude oil prices close to US$100 per barrel. Rising food prices have also been a factor, with analysts suggesting that shoppers will spend at least GBP1000 more this year when buying groceries.

Although the market went into a dive on the release of the inflation figures, mid week, the footsie traded higher as Vodafone pleased the market by raising full year guidance. The forecast range for adjusted operating profit has been upped to £9.5 billion to £9.9 billion on revenues of £34.5 billion to £35.1 billion as emerging markets, such as Turkey and India, assume proportionately greater importance. Vodafone shares gained 13.50 to 195.50. Old Mutual PLC opened Tuesday at 163.00 closing at 167.20.

FOREX MARKET

After retreating only marginally last week, the Zimbabwe dollar received fresh blows this week closing the week at Z$3,650,000 to the Pound Sterling. The US$ was fetching approximately Z$2,100,000 in London and in Harare due to increased impetus on imports including the importation of seeds in preparation for the planting season.

Individual shoppers are said to have besieged Forbes Boarder Post after the scrapping of visas to visit Mozambique. Most of the travelers were reported to be in search of scarce commodities such ad rice, flour, cooking oil and soap which are available in Beira. Remember the ‘good old days’ when the only encounter we had with our good neighbours from the east was when their boys would come to our rural areas begging for ‘cattle herding jobs’. How times have changed.

CORONATION TIPS – BOOK REVIEW (A must read, Book written by a respected Zimbabwean lawyer living in the USA)

‘TOUCHING THE AMERICAN RAINBOW – BY TAPIWA KAPURURA’
Leaving Africa as an attorney, the young man from Zimbabwe left family and friends, and sold all his earthly possessions, hoping to start a better life in America. He took everything for granted.

Considering himself educated enough to easily fit into the American job market, he hoped to easily pass the legal bar exam, become an American attorney and live "large." Before departure, he combined his childhood fantasies with a mature analysis, convincing himself that he was bound for the biblical Canaan- "a land of milk and honey"

Just like anyone from the Third World, the author possessed a vivid-colored picture of America. He never contemplated any glitch in the transition process. Because of media hype, celebrity "buzz" and Hollywood stories, he believed he was coming to a Nirvana, hoping to strike gold and associate with celebrities upon settling. It took only a few weeks after arriving in America for the painful reality to strike. He needed to survive!

In order to do so, he compromised his professional status, took off the legal robe, rummaged for furniture from dumpsters, applied for jobs as a high school graduate, improved his accent and endured the culture shock test.

This is the fascinating, inspirational story of a young man's quest to touch a piece of the American rainbow, and what it took to finally grab hold – Excellent Book, we highly recommend this book as a must read, its unputtadownable.
Available on www.amazon.com and on www.amazon.com

Lance Mambondiani is an Investment Executive at Coronation Financial, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at coronation.uk@btinternet.com. Please contact us should you wish to subscribe to our mailing list.
_____________________
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