THE Zimbabwe Stock Exchange has been on a tailspin, plummeting by over 82% since Monday last week to Wednesday this week. Many investors have lost their money on the market in more or less the same fashion that has gripped global markets. Many shares have collapsed, including heavyweights such as Old Mutual. Businessdigest reporter Paul Nyakazeya (PN) this week interviewed economist Brains Muchemwa (BM) on what has been happening on the stock exchange.PN: Can we conclude that the bubble has finally burst after measures taken by Reserve Bank governor Gideon Gono last week?BM: It is very difficult to evaluate statistically and it may remain a speculative debate.PN: Why would you imply the bubble has not burst when the stock market has plummeted by such proportions?BM: A bubble bursts when investors make huge losses in real terms. Look at what has happened in the major global housing markets and regional bourses such as the JSE down 58% in real terms, the Lusaka Stock Exchange down 28% in real terms and the Botswana Stock Exchange down as well 58% by Monday. What has happened on the Zimbabwe Stock Exchange is far from being a real bubble bursting because no one knows the fair value of the exchange rate. And taking the Old Mutual Implied Rate to be the proxy, the market goes up and down with it. Hence really very few recorded real losses from that perspective. However, in nominal terms the bubble has burst for those that bought at the peak mid-November, but surely a serious investor should not worry about nominal values in a hyper-inflationary environment. PN: Going forward, is the market likely to recover in the short-term?BM: The lessons for 2003-2004 and 2006 are clear to us. The market will remain bearish only by the extent to which the Reserve Bank will be maintaining a very tight liquidity position in the market. All asset price buoyancy is largely a function of excess liquidity. Look at how prolonged periods of soft monetary policy by the US Federal Reserve buoyed the Dot Com bubble in the early 2000 and the sub prime mortgage bubble to 2007. And locally of course how excess liquidity has buoyed nominal house and stock market prices in 2005, 2007 and 2008. What we need to understand is that the central government and related institutions resort to the Reserve Bank of Zimbabwe for funding in the face of the persistent high budget deficits, and the sources of government revenue, largely tax from corporates and pay-as-you-earn, are dwindling fast. Therefore liquidity will soon be coming back into the market and the upward rally, net of the margin of rogue trading, will begin. PN: Why would investors continue to pile on the Zimbabwe Stock Exchange and shun other investment markets?BM: Investors are looking at value creation and convenience of investment. The economy is dollarised, and many companies no longer sell by cheques or RTGS, and are demanding the scarce cash and foreign currency. Hence the goods market is not easily a tenable alternative for households and corporates with excess cash balances. Therefore anyone with Zimbabwe dollars is faced with options of the money market with negative real returns, the property market that needs loads of money to enter or the convenient local bourse. That is why the stock market has many favorites, and of course it’s not a bad attitude to have a saving culture as a people. PN: There is a general view that most assets and listed companies in Zimbabwe are trading at excessive discounts today. What’s your view?BM: That is a general view, as you have said. Look at it from this perspective. An asset is trading at discount if one is confident they would realise better value in a reasonable foreseeable future when the true value becomes known to the market. In my view there are no assets trading at a discount in Zimbabwe. The market values reflecting on the assets are taking into consideration the state of the economy, the economic, political and business risks, the prospects of future earnings, current consumer demand and more importantly, the opportunity cost of capital in a global environment. Hence investors are taking all relevant available information to arrive at the fair value we see tagged on companies today. Of course there are some listed companies that are trading below the replacement cost, but still the issue comes to the exchange rate that one uses among the many that exist. No one knows where the exchange rate will settle when there is stabilisation and that makes the argument of fair values difficult to conceptualise unless the stock market starts trading in US dollars.PN: Is there merit in the ZSE trading in US dollars?BM: If there is merit in OK, Edgars, National foods and Delta, for example selling in US dollars, why not then trade their values in that currency if possible for ease of valuation?PN: What do you take of the performance of foreign currency licensed companies?BM: The eventual stabilisation and predictability of US dollar cash-flows will improve earnings, but for selected counters largely in industrials. Services sector companies will be the last in the chain to enjoy the benefits as the Zimbabwe dollar which is being rejected by some quarters will continue to dominate their cashflows and balance sheets.PN: After events that happened last week, what would be the best investment strategy on the stock market? BM: With excessive inflation and acute market volatility, it is very difficult to consistently beat alpha. And besides, crystallisation of value is usually mythical on the stock market because of the rapid loss of value that once existed on the market. So my advice is largely for one to identify quality counters today and stick to them until the economy stabilises. Active trading is very dangerous in a market with acute volatility.PN: There has been a global meltdown because to the after-effects of the US sub-prime mortgage market crisis. How safe is southern Africa and Zimbabwe in particular?BM: Southern Africa is suffering largely from its commodity backed currencies that have taken a tumble as commodity prices have taken a huge slump. The tumble in currencies has instigated withdrawals of carry-trade related portfolio investments, creating second round pressure on currencies thereby creating more volatility and weakness we see today on the rand, pula and kwacha. Zimbabwe is slightly immune because we are not so open an economy. However, because the country leans heavily on remittances from abroad, the credit crunch out there is affecting incomes of Zimbabweans working abroad, and eventually the inflows will be thinning out. That creates a slowdown in economic activities here.PN: After this crisis, what could be the next crisis on the markets?BM: It is very difficult to predict crises, but the fuel coupons crisis could be the next. Fuel coupons are replacing the payment system as more people and business are demanding payment by these ahead of local currency. Anyone who can issue a fuel coupon has become an issuer of choice and value, and that could become another pyramid to crumble as rogue trading schemes are much more possible if the speculators descend on the scene big time.
