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Last picks of a ‘bull run’ year

By Lance Mambondiani



THE movement of the industrial index this year has been seismic, registering on local and international financial radars.


The

current bull run is arguably the longest on record and by far the most rewarding. The danger in a bull run is that investors become bored due to “serial optimism”.


It is particularly difficult to stay focused when there are no signs of the market steaming off. For fear of becoming mundane, analysts will try and “heat the leftovers to make them look more appetising”.


Since July, we have been talking about the bull run and how to benefit from it. We have convinced customers that it is not a bad idea after all to look at Zimbabwe as an investment destination.


Even with phenomenal gains under record, there are still some investors who remain unconvinced. Although the majority of investors would find the words profitable and Zimbabwe to be oxymoronic, recent figures on the performance of the stock market in US dollar terms may provide comfort to cynicisms.


Although there is clearly an increased interest in investing on the stock market, the performance of portfolios in hard currency is not the only reason new investors are not rushing to the ZSE despite recent performance.


Research conducted by Coronation Advisory Services on 200 ZSE adult investors revealed that the biggest deterrent to potential investors is actually a lack of knowledge and understanding on how the stock market works rather than the risk factor.


Affordability was the most common reason for not having any stock market exposure (47%), while 32% said they were not confident enough to invest on the stock market due to lack of understanding.


Another 24% said they were worried about the rate of inflation in Zimbabwe.


Women were more cautious than men in terms of stock market exposure. Of those considering investing in the stock market for the first time, more than 82% of men appeared keen compared with 18% of women.


For the greater part, stock markets have been mystified as a preserve of blue-collared graduates with MBAs and finance degrees. Nothing can be further from the truth. Most of the deterrents to investing on the market are due to lack of relevant information allowing investors to make informed decisions without “clucking” around.


When trading shares, many people fall victim to human nature often falling within patterns of psychological pitfalls oscillating between linear perception, group think and what has been referred to as the messenger syndrome.


The patterns on the ZSE show potentially volcanic herd behaviour with investors trading in groups. Remember that all paper profit comes with a price.


While the market has clearly been on a rebound this week, the ZSE remains a market where quality and caution should be core to your investment planning. In the last two weeks, we advised investors that the nature of the run suggests that profit-taking was inevitable.


The challenge however is what to do with the profits once you have taken them. Your guess is as good as mine; my short answer is buying more shares on the cheap.


Going forward, we see no fundamentals likely to cause a slowdown in current market trends. Predictably, the market is on an autopilot at least until the end of the year.


The big question remains whether the returns on the stock market are good for money in US dollar terms?


An analysis by Kingdom Stockbrokers last week on the performance of stock prices in US dollars between January and October 2007 suggested that most counters experienced negative growth, losing value in US dollar terms during the period under review despite huge increases in share prices showing that in real terms “shares have not grown as portrayed by some quarters”. While this may well be the case with some counters, that conclusion is not supported by the figures.


Firstly, average performance of share prices is better observed from changes in the indexes which represent the broad movement of a basket of shares, rather than individual share prices.


Secondly, the generalised position fails to take into consideration the inherent weakness in the Old Mutual implied rate as a measure of parity. In an imperfect market, even the OMIR proxy has been trading at huge premiums to parallel market rates on the ground providing huge distortions.


Lastly, since the Zimbabwean share market is largely inward-looking based on approximately 80% local investment in an economy imploding due to balance of payment contractions, it is particularly difficult to yardstick the market using the US dollar. It’s like comparing oranges to lemons expecting a similarity simply because they are both citrus.


Positional objectivity demands that the performance of the market be benchmarked on internal parameters and compared to US dollars for “rain coat” purposes only and not as a measure of performance.


Despite these inherent complexities, even the comparative analysis shows encouraging signs. In US dollar terms, the industrial index shows a 12% gain in market capitalisation, while the mining index is up 49%. The total market capitalisation between the periods under review shows a 15% increase, despite policy gyrations, hyperinflation and predominantly localised investments.


The fact that a number of counters show negative growth in US dollar terms becomes a matter for portfolio selection and diversification. Investors seeking a currency hedge know where to find them.


The Old Mutual share price is up 19% in US dollar value, while PPC is down 93%. Most mining counters have put in significant gains in dollar terms: Bindura (109%), RioZim (-13%), Hwange (122 %) and Falgold (299%). In local currency, there is no doubt that the market has adjusted significantly, bringing glory to many investors.


With the year is almost over, the stock market will start to slowly cool off ahead of the festive season, trading in short cycles punctuated by profit-taking.


There are a couple of counters we recommend to our investors as the last picks for the year. In the next two weeks, we recommend Kingdom, Meikles and FBCH as our top picks.


After the four-way merger of Kingdom, Meikles, Tanganda and Cotton Printers, the emerging entity, Kingdom Meikles Africa Limited (KMAL) with Nigel Chanakira as CEO will start trading on the ZSE on November 26, with a secondary listing on the LSE.


The company will become one of the biggest companies on the ZSE in terms of market capitalisation. Kingdom shares will be consolidated at a ratio of 17,67 for every 100 Kingdom shares, meaning for every 100 Kingdom shares owned, investors will be issued with 17,67 Meikles Africa shares. This represents a highly discounted weighted average ratio that is likely to benefit customers holding Kingdom shares. Buy before the consolidation.


Arbitrage opportunities


The mispricing of shares on the ZSE creates several arbitrage opportunities for investors exposed to more than one market. An arbitrage opportunity is an opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price. A simple example is if you buy an asset for $10, then you turn around and sell it for $20 and make $10 for identifying the opportunity. The $10 represents the arbitrage profit.


There are a number of arbitrage opportunities on the ZSE. The Old Mutual share price is an example. Old Mutual is listed on the ZSE, JSE and the London Stock Exchange.


The Old Mutual share is fully fungible, meaning you can buy it on the LSE and transfer it to the ZSE or the JSE without any limitation. The shares however cannot be transferred from the ZSE to the LSE due to exchange

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