Bourse in terrific form

 Investors are descending on the ZSE in their numbers to hedge their investments against runaway inflation, estimated to be running above one billion percent, according to independent estimates.

“IN a hailstorm, even chickens can fly,” said one top executive on observing the northward trend on the Zimbabwe Stock Exchange (ZSE).

Despite the economic turmoil in Zimbabwe, the bourse has been in terrific form.
The rally seen on the stock market in recent weeks has not been restricted to blue-chip counters alone; it has been across the board.
Investors are descending on the ZSE in their numbers to hedge their investments against runaway inflation, estimated to be running above one billion percent, according to independent estimates.
With the money market, stuck in negative territory owing to below inflation returns, investment options have narrowed to stocks, property and foreign currency. But not many people are willing to take the risk by holding on to foreign currency outside the banking system because of the rigid Exchange Control Act, which criminalises parallel market transactions.
The property market, another hedge against inflation, has been a preserve for the “big fish” so to speak because the astronomical values attached to properties, be it industrial or residential, are a huge deterrent to small investors.
Investors are therefore, channelling all their extra resources on the stock market, unleashing the bulls on the market.
The market has been in a rally for a prolonged period with some huge gains, never seen on the ZSE before, recorded across the board.
On Monday, the benchmark industrial index gained 241 percent, the biggest single day increase, to close at an-all-time-high 78,108,522,494.03 points. The resource index, also on Monday, put on 205 percent to end the day on 84,613,202,411.00 points.
But the biggest question on the lips of most analysts is: How sustainable is the bull-run?
There are fears that investors could be skating on thin ice and might lose their hard-earned income should the market crash.
While the hailstorm has given the chickens the false impression that they can fly, the risk of them crashing should unnerve investors.
There is nothing really in terms of fundamentals to underpin the upsurge in stock prices.
Whereas in the past the stock market used to mirror the state of industry, it now presents a distorted picture of what is happening throughout the enfeebled economy.
The economy has ground to a standstill and yet the stock market has defied the odds, performing as if it is on steroids.
In the mining industry, most gold mines have scaled down operations despite firming international prices with the central bank scrounging for funds to pay gold miners due to chronic shortages of foreign currency.
This month, Turk Mine, about 55 kilometres north of Bulawayo, stopped gold production and was placed on “care and maintenance” because it has not been paid nearly US$3 million it is owed by the Reserve Bank.
In the industrial sector, reports suggest that most companies have ceased production due to the tenuous economic situation that has seen inflation topping 231 percent in July, the highest inflation rate in the world.
Industry is suffocating under the weight of price controls, high production costs, subdued demand, coal shortages, intermitted electricity cuts and the brain drain of mostly critical skills. In agriculture, the onset of the rains has caught farmers least prepared.
Shortages of major agricultural inputs such as seed, fertilisers and chemicals have conspired to dash any hope the country had of emerging out of the economic crisis, now in its ninth year. Farai Dyirakumunda, a local analyst, said there are two categories of investors on the ZSE; those seeking to preserve value and those buying shares because they believe an economic rebound is imminent.
Dyirakumunda said the upsurge in share prices is a self-correcting mechanism whereby stocks are adjusting to exchange rate movements.
“On the parallel market, the currency is rapidly depreciating. There is also an element of confidence where expectations are that there won’t be any meaningful rescue package to hold the depreciating currency,” he said. South African President, Kgalema Motlanthe partly confirmed this view last week.
Motlanthe, who replaced Thabo Mbeki, as head of Pretoria’s administration, said the international community will not move in to assist Zimbabwe with an economic recovery plan if there is no government in place as mandated by the power-sharing agreement signed on Sept-ember 15 between ZANU-PF and the two factions of the Movement for Democratic Change (MDC).
ZANU-PF and the MDC have not made significant progress in implementing the historic power-sharing agreement, seen as the panacea to efforts aimed at recovering the country’s economy, because of a dispute over the sharing of key ministries of Finance, Home Affairs, Foreign Affairs, Information and Local Government.
This week, a meeting of the Southern African Development Community (SADC) Organ on Politics, Security and Defence that had been scheduled for Swaziland was postponed to Monday after the MDC leader, Morgan Tsvangirai could not attend because the government had not issued him with a passport.
Asked whether the stock market bubble will not burst, Dyirakumunda said: “The market won’t necessary plunge because, in real terms, the share prices are still undervalued.
“They can only be a bubble if, by miraculous means, there is significant foreign exchange inflows (into the country) that can push parallel market rates up.”
He however, urged investors to be cautious when dealing in shares.
“Production in industry is the major challenge because when buying (shares) you are basically buying into underlying assets.
“You may have closures, which is why investors have to be careful with their stock selection,” he added.
In its commentary, Infinity Asset Management (IAM) said the bulls are also supported by the fact that the bourse is the only legal, viable market for achieving returns that reasonably cover up for the inflation risk premium.
“The postponement further solidifies the general perception that the deadlock is far from being resolved.
“Also worth pointing out is the fact that even the SADC Troika will still have no capacity to impose any binding proposal for the Zimbabwean deal in terms of the allocation of Cabinet ministries,” said IAM.
Kingdom Financial Holdings Limited (KFHL) concurred that the sustainability of the equities market, like the economic prospects of the country in general, is a function of developments on the political front.
“The stumbling block is disagreements over the allocation of ministries.
“The issue has become so problematic that the matter has been referred to the SADC Organ on Politics, Defence and Security,” said KFHL in its weekly commentary.
“Reflecting the delay in the formation of the much-awaited coalition government and the resultant delay in the implementation of policies to stabilise the economy, buying pressure increased immensely on the blue chip counters, which saw the equity market putting up yet another 1-day record breaking performance on Thursday 16/10/08) after the industrial index gained 169.7 percent whilst the mining index was up 192.8 percent,” said KFHL.