Profit taking drives market sideways

By Willing Zvirevo

“The key to making money in stocks is not to get scared out of them” – Peter Lynch.

OVERVIEW

The stock market has remained defiant to the myriad of economic challenges the country is currently facing, with both the industrial and mining indices remaining firm.

Due mainly to expected profit-taking episodes, the week ending 16 November 2007 was characterised by mixed trading, with marginal gains in the early part of the week being followed by losses as the week progressed.

However, despite being a little sluggish, the stock market remained bullish, propelled largely by fundamentals of money supply growth on the ground and what now appears to be a voracious appetite for stocks by investors.

Most investors who took profits on counters whose prices were almost exploding will certainly have an early Christmas. The challenge for most investors remains what to do with the profit now sitting in the bank. Our advice is simple: do your Christmas shopping, spoil the kids, pay off your debts, reinvest the balance in undervalued stocks and thank God it was a bull run year! There are some who are still so risk averse that they would rather miss the vast opportunities on the stock market than put their money at risk. The trouble is, if you don’t risk anything, you risk even more.

The writing is on the wall that as long as returns on the money market remain grossly negative, the stock market is likely to remain the main investment destination. There are people who still feel that investing on the stock market is speculative, just as good as gambling. Speculation and investment are two different things, even though both may take place at the stock market. Just to borrow from Fred Schwed Jnr: “Speculation is an effort to turn a little money into a lot. Investment is an effort to prevent a lot of money from becoming a little”. Investing on the ZSE is therefore a genuine attempt by investors to make real returns and protect the value of their hard earned money in a very inflationary market.

Generally, in a Bull Run situation most investors make money. As investors continue buying and share prices continue rising, almost anything you buy goes up. It makes you feel that investing in stocks is very easy and safe, and that you’re a financial genius.

In most stable markets, where there are no market distortions characteristic of the Zimbabwean market, stock market investment and portfolio selection are done based on a careful analysis of political and economic developments and corporate fundamentals. The current market conditions in Zimbabwe have made almost everyone feel that stock market risks are at their minimum. Over-confidence and optimism have taken over, and the most elementary of precautions are evidently being watered down.

Whilst we believe the current Bull Run will be followed by a market correction which should take place sometime in the future, particularly given that some counters hardly have any strong corporate fundamentals to back their current prices, we do not expect the correction to come in the form of a market crash. A market crash, as distinct from a bear market, is characterized by panic selling and abrupt plunges in share prices.

The current Bull Run is not being driven by economic optimism and neither is it being driven mainly by expectations of strong corporate performance. For that reason, and baring a dramatic shift in monetary policy thrust, any negative economic information that filters into the market such as inflation increases, weakening currency, widening budget deficit and increased Government debt is not expected to perturb the market.

However, when the market starts correcting, whenever that happens, counters that are not backed by strong corporate fundamentals will be affected more. We therefore advise investors who have a low appetite for risk to base their investment decisions on corporate fundamentals. We also recommend investors to take a medium term view so that they will not lose sleep over short-term losses that may come with continued profit-taking episodes.

STOCK MARKET UPDATE

Despite the mixed trading that characterized the week, both the industrial and mining indices closed the week in positive territory. The industrial index put on a marginal gain of 0.7% to close the week ended 16 November 2007 at 542 666 721.41 points, whilst the mining index continued the lead with a 10% gain, thus closing the week at 734 464 763.21.

TABLE 1: MOVERS AND SHAKERS

MOVERS				SHAKERS
Counter	Price on 09/11/07	Price on 16/11/07	% change	Counter	Price on 09/11/07	Price on 16/11/07	% change
RTG	40 000	85 000	113	Seedco	375 000	250 000	-33
Nicoz	20 000	34 000	70	Circem	2 600 000	1 800 000	-31
Celsys	3 000	5 000	67	Interfresh	30 000	22 000	-27
Turnall	25 000	40 000	60	Chemco	5 000 000	3 700 000	-26
CAPS	20 000	30 000	50	ZPI	18 000	14 000	-22

Source: Coronation Advisory

The week saw middle and lower tier stocks spearheading the movers, led by RTG, Nicoz, Celsys and Turnall. Gains in mining were driven by Hwange and Falgold, whilst Bindura and Rio traded lower. Seedco and Circem led the shakers, declining 33% and 31% respectively. Overally, thirty-six counters gained, albeit on lower margins, sixteen were unchanged at previous week’s levels whilst thirty counters were in the red.

However, the losses that dominated the later part of last week continued into the current week, with the stock market opening the week softer, pulling both the industrial and mining indices down by 6.31% and 9.06%, respectively, on Monday 19 November 2007. This decline was on the back of widespread losses across the board, with notable declines in PPC, Econet, Cottco, Delta, Kingdom and Barclays. Only Circem, Meikles and Afdis traded in positive territory on Monday. Losses in Bindura and RioTinto pulled the mining index down, whilst other mining counters did not trade.

The market continued on a downward trend on Tuesday 20 November 2007, with the industrial index declining by 9.31% whilst the mining index lost 10.53%. Whilst there were widespread losses across the industrial counters on Tuesday, the crowd pullers were PPC, Old Mutual, Circem, Chemco, Econet, TA, Tanganda and Delta.

The only movers in Tuesday's trade were NicozDiamond and Interfresh. As investors continue to take profits, we expect the market to continue on a downward trend before steaming off ahead of the festive season. Investors should capitalise on current weaknesses and take positions ahead of year-end. Our favourate picks currently include CFI, NicozDiamond, ABCH, Zimsun, Econet and ZHL.

For our Top 5 list of Money Transfer Agents in the UK, which are registered, efficient and trustworthy e-mail the Coronation Geeks with the words MTA in the subject box. Our MTA rate comparison is a free service to our valued clients.

STOCK MARKET OUTLOOK

Both the 2008 fiscal budget and second half monetary policy statement for 2007 are expected to be presented before the end of the year. Given Government’s current debt position and grandiose funding requirements, as well as the continued injection of concessionary funding into the market by the central bank, we expect the inflation spiral to continue in the short to medium term, fuelled by unyielding money supply growth.

In the absence of huge foreign funding and/or increased productivity across all productive sectors of the economy, the central bank will find it extremely difficult to adjust interest rates in line with inflation, hence we expect investment rates on the money market to remain depressed.

The stock market is currently the main beneficiary of the continued increase in money supply and the negative returns on the money market. Despite significant funding disbursements to the productive sector under the BACOSSI facility, the market is still short of most basic commodities. It remains to be seen how this situation is going to be dealt with, including the pricing framework for imported raw materials and products which Government has directed manufacturers and retailers to comply with.

We believe the stock market will continue to remain attractive, and investors should buy into current weaknesses on a medium term view. However, investors should exercise caution and not be shrouded in the stupor of past gains when taking new positions. We have warned before that some counters are perennial non-performers, and the best way to get out of trouble is not to get into it in the first place.

Whilst opportunities for quick gains are plenty on the ZSE, investors should also be aware that being a stock market investor requires patience, as sometimes your current holding may not be the best portfolio mix for the moment. Paul Samuelson puts it shrewdly and succinctly: “Investing should be more like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas”.

FOREX MARKET

Exchange rates on the parallel market continue to be affected by the now acute shortage of cash, with the GBP, USD and ZAR trading closely around last week’s levels. The USD is trading between ZW$1.3 million and ZW$1.5 million for cash transactions, whilst the Rand is in the ZW$180 000-200 000 range. The GPB normally trades at about twice the USD rate. The premium on RTGS transactions has increased significantly as the deepening cash crisis continues to bite currency traders.

Information is already in the market that the RBZ will be introducing bigger denominations of bearer cheques to ameliorate the challenges of a currency fast losing its local value due to high inflation. However, in the absence of a slow down in inflation and an increase in the availability of basic commodities in the shops, the new bearer cheques are likely to suffer the same fate as the current family of bearer cheques: Extinction!

Willing Zvirevo is a Financial Consultant 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. You can also contact the Coronation team on; Business lines +44 161 346 9559 or mobile +44 790 3293 227.
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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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