[2008-01-25]  ZSE party about to come to an end

A STOCK exchange, share market or bourse is a corporation or mutual organisation which provides facilities for stock brokers and traders, to trade company stocks and other securities.

Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks.

In Zimbabwe’s case, there has been firm demand unaccompanied by any meaningful new issues of shares. The prices on the Zimbabwe Stock Exchange (ZSE) have gone up to such an extent that some have claimed the ZSE is inflationary.

On average, the ZSE has been adding on $4 trillion daily since January 1. But the ZSE party may be about to come to a dramatic end.

The crash will most likely occur due to a regulatory induced action engineered to curb what is being mistakenly viewed as speculation.

The lack of quality investments and the unstable operating environment has forced institutions, individuals and corporates into the stock market.

Companies haven’t invested in long term projects as the policy remained both inconsistent and unpredictable. As a result, any surplus funds have been ploughed into the stock market.

According to Zimbabwe’s Banking Act, it is illegal for banks to own shares unless if they are being held as security for a loan.

So those banks holding shares for trading purposes will most likely be caught with their pants down, as authorities open the "scapegoat finding season".

Those familiar with this will know that the "scapegoat finding season" visits us once in while just before any major election.

Big companies that have been out-doing each other buying each other’s shares need to devise an escape route in good time. The monetary authorities have been watching whilst companies were engaged in systematic corporate cannibalisation, whereby companies just keep buying each others stock irregardless of productivity or profitability.

The corporates who have failed to stock the shelves despite accessing the Baccosi facility need to sell their shares fast and make sure people have full stomachs ahead of many star rallies. If they don’t, the RBZ will ensure they comply.

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth.

Zimbabwe has the fastest shrinking economy in the world (outside war zones) yet its stock market has been performing wonders both in United States dollar and in Zimdollar terms.

The ZSE moved by about 90% between December 2006 and December 2007 (US$2,4 billion to US$4,6 billion). An economic recession or financial crisis could eventually lead to a stock market crash.

Therefore, the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. This hasn’t been the case in Zimbabwe.

This implies Zimbabwe has a unique situation because the stock market has firmed when the economy was collapsing.

This has happened because all excess funds have been forced into the stock market due to lack of any meaningful and legal options.

Current market volatility makes it difficult to embark on any long term projects as policies keep shifting.

The stock market is one of the most important sources for companies to raise money.

This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.

Banks and other institutions have been accused of holding "non-core assets" and engaging in "non-core" activities. This presents the RBZ with a good sample to select appropriate whipping boys to open the latest round of "scapegoat finding season".

History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behaviour of the stock market and, in general, on the smooth operation of financial system functions.

So it’s important that authorities exercise caution and restraint in their endeavours to correct the banks’ portfolios.

Clearly banks and other market participants have been forced to adopt such survival strategies in face of a very hostile operating environment. In a market where inflation is reportedly at 150 000%, there are very few legal alternatives.

The ZSE has remained the one of the few legal investment options available to Zimbabweans. This has led to a sustained rapid increase in share prices. This has also led to a mistaken belief that shares only can go up. Beware! The problem with being an island of success surrounded by poor performers is the unwarranted attention.

This means the ZSE is attracting attention which may be good or bad for investors. There are risks associated with this attention.

Given that Zimbabwe’s formal sector has been systematically decimated, the ZSE remains the only viable destination which can match if not beat inflation.

It has been erroneously argued that the ZSE price rises are inflationary. The fact is the ZSE became such a viable destination for investment because investors were in desperate need of legal means to beat inflation. Whilst authorities may want to punish or penalise the banks, this would be ill-advised.

In financial markets, a stock market bubble is a self-perpetuating rise or boom in the share prices of stocks of a particular industry.

Zimbabwe’s stock market can’t be described as overvalued. Due to the rapid Zimdollar depreciation, Zimbabwean assets remain cheap in US$ terms.

The billions which have been made on the ZSE are not in themselves inflationary but only become inflationary once the new billionaires try to enjoy their wealth and chase the few goodies available. And due to limited supply, the
sellers respond by increasing prices without any improvement in quality.

Research has shown that psychological factors may result in exaggerated stock price movements. It has demonstrated that people are predisposed to ‘seeing’ patterns, and often will perceive a pattern in what is, in fact, just noise.

Another phenomenon — also from psychology — that works against an objective assessment is group thinking. An example with which one may be familiar is the reluctance to enter a restaurant that is empty.

The stock market, as any other business, is quite unforgiving of amateurs. As they say, the market has no memories. So, yesterday’s spectacular rises can become tomorrow’s dramatic crashes!

Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities. Therefore, the stock market can be swayed tremendously in either direction by press releases, rumours, euphoria and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to predict. So, investors need to remain calm instead of panicking which may amplify their losses.

Source: (C) Zimbabwe Independent 2008