[2008-09-18]  Stock market remains investors’ best option
FOR the past half-decade, Zimbabwean capital market investors have been caught in a bittersweet "dilemma". Do they focus on the falling economy or do they concentrate on the risky stock market?

Naturally or otherwise, the stock market has been the preferred bet. With runaway inflation, sitting at 11,2 million percent July end, investors have managed to gain some value from equity investments. Whether these returns mean anything in real terms is something else.

But millionaires, in US dollar terms, have been born out of the Zimbabwe Stock Exchange in the last five years.

Not the same can be said about those investors locking in capital in interest bearing assets.

The money market has been one big bore. Deposit rates have been religiously suppressed owing to successive surplus market conditions. Rates are averaging 100 percent on the short-term paper. Even though, high inflation has ensured the continuation of negative real returns on money market investments.

Other risk-averse investors may have found home for excess liquidity in the property and foreign currency markets. There has been no real risk in these markets, save for occasional brushes with the law.

But everyone knows all too well there are those above the law, and only a cheap bribe will hand them freedom from the police. It has not been uncommon for street market currency dealers to be picked up by police for fanning speculation, or for real Estaters to be ‘questioned’ for selling houses or charging rentals in hard currency.

Now, for good or, more probably, ill, the dilemma is on its way to resolution. Contractionary forces are winning. If so, this does at last clarify priorities.

The signing of the deal on the formation of an all-inclusive Government between Zimbabwe’s main political parties, Zanu-PF and the two MDC formations, brings in a new breath of political and economic priorities.

The successful conclusion of the talks was largely expected to push equities higher.

If they were to fail, the stock market was seen racing even higher. The difference would mainly be on growth rate.

What then does the future hold for the stock market investor, in view of the new political arrangement?

Really, responses have been varied but there are two fundamental aspects one must consider when looking at entering the ZSE. The first factor is inflation. How far can inflation continue on the increase without the economy mending?

If you are looking at speculative picks, then obviously your best bet is that Zimbabwe’s inflation will not stabilise until at least after the next three to six months.

Even then, inflation will still be unsustainably high and so those who have been buying to hedge against it can make some sense out of the market.

Unless food and service prices reverse swiftly, which seems unlikely in today’s somewhat grim economic circumstances, we can expect a period in which headline inflation starts to converge on — and, quite possibly, falls below — measures of core inflation.

This may take a little while, but the great likelihood is that the inflation picture will look substantially less dire by the end of next year, with further improvements likely in 2010.

The second factor is that of economic recovery. Now this depends on the commitment shown by the merging political parties. As with inflation, immediate economic recovery is not possible.

Anthony Hawkins, a professor at the University of Zimbabwe has been quoted by the BBC saying it may take up to ten years before any real economic changes start to show. This is a point of debate, as it may.

But more importantly to achieve macro-economic stability will be crucial for the equities investor.

It supports the return to fundamental analysis of shares, and somewhat try to eliminate speculation.

Really, investments on the ZSE are no longer guided by such factors, as earnings guidance, structure and portfolio of a counter etc. Punters were simply buying, and buying into any stock.

It was already preconceived that the market can only rise in an economy with such unprecedented inflationary pressures.

And unless these key economic fundamentals show any rapid shift, to investor on the ZSE may continue to be a case of speculation in the short-to-medium term.

For the long-term investor, manufacturing stocks, retail, mining and exporters can be best buys.

Statistically, the mainstream industrial index is up over 6,1 billion percent on a year-to-date basis while minings have gained 4,1 billion percent, which compares with annual inflation at 11,2 million percent at the end of July.

For the first time in many weeks, the stock market started reporting losses on Tuesday September 16, as investors took profits.

The main index fell 47 percent while minings declined by almost a similar value.

Yesterday, there was some recovery with the key index up 33 percent to 8 149 004 points. The resource index rose 58 percent to 8 327 681 points. Inflation, the main ZSE driver over the past 5 years, is expected to remain high in the short-term, and thus provide opportunities for equity market investments.




Source: THE HERALD