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Can this bull run be sustained?

Royal Bank markets

FOLLOWING the parliamentary speech delivered by President Robert Mugabe announcing a low interest regime, and the announcement of the June inflation figure at 364,5%, the 500 000 m

ark of the benchmark industrial index was breached.

This saw the most bullish forecasts for year-end being surpassed.

However, the most pressing question, which remains in the minds of most investors, is whether this bull run will be maintained or whether the equities markets have reached burn levels.

The worrying aspect of this market is that it does not seem to be operating according to any underlying fundamentals.

On a historic basis, the P/E ratios of many counters make this appear to be a very expensive market.

The fact that counters such as Mashonaland Holdings, Rainbow Tourism Group and Willdale are trading on lofty and undeserved P/E’s of upward of a 100x signifies the illogical workings of this market.

However, that being said, on a forward P/E basis, the market still looks very attractive especially financial counters, which are on forward P/E’s of around 3x.

Is there a method to the madness?

Inflation Vs interest rates. Ask any stock market fundi and they will assure you that there is no other investment vehicle that will preserve the value of your money and give you a positive return besides equities.

With current real interest rates remaining in negative territory (around 280%) and a very real threat that they will be capped at even lower levels, the equities market is one of the two (legal) options for beating inflation, the other being property.

Below is a table illustrating how an investor who had taken on some exposure to some of the counters that we advised will have fared;

Earnings release period: In our opinion this results releasing period will also remain a factor that gives impetus to the current bull run.

Thus far the earnings reported have been pleasing and the market responded well. Interfresh posted a pre-tax profit of $3,8 billion and earnings per share of $6,19 for the half-year ended June 30.

Historically earnings for Interfresh are stronger in the second half and thus the market responded very well to these excellent results and the share price appreciated by 74% by the time of writing this article.

The market also responded well to the results posted by Barbican Holdings.

The group achieved profit after tax of $525 million and earnings per share of $4,60 for the half-year ended June 30, the market rewarded this improved performance and the share price jumped from $45 to $60 by the time of writing this article.

If we continue to receive such upbeat results, then the extra impetus required to keep the bull running will be a given.

Movements on the parallel markets. Garnering what one can from the local press, it seems exchange rates on the illegal parallel markets have moved substantially.

There are indications that the United States dollar rate is now trading upwards of $4 000:US$1 from $2 000:US$1 – a depreciation of 100% in a week.

The chronic foreign currency shortage situation will remain unchanged as the supply side has not been addressed.

With such movements being experienced in the foreign currency markets, investors will want to take positions in counters which are currency hedgers such as Meikles and Old Mutual.

Since these counters have large market capitalisations and consequently heavier weighting in the index, they will inadvertently continue to pull the market up with them to greater heights.

Basically, the law of gravity categorically states that what goes up must come down and at some point the equities markets must come down.

The main challenge that an investor faces is of correctly timing their exit from the stock market.

Quite honestly, there is no one on earth that can claim to be able to time the market. If such a person existed then he would have the whole world worshipping at his feet.

True to fact, we foresee that there will be a slight dip in the market, particularly ahead of the Heroes Day holiday but after that, it will be full speed ahead especially after we receive the July inflation figure which we conservatively expect to be around 390%. Thus we recommend that investors hold onto their investments for further gains.

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