ZSE party may be about to come to an end

MUPONDA'S ARCHIVED ARTICLES

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• Muponda: Corruption driving Zimbabwe's inflation

• Muponda: How Zimbabwe lost control of inflation

By Gilbert Muponda

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 ZSE have gone up to such an extent that some have claimed the ZSE is inflationary.

On average, the ZSE has been adding on Z$ 4 trillion daily since January 1, 2008. 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. In my previous article, I defined speculation in financial terms.

The lack of quality investments and the unstable operating environment has forced institutions, individuals and corporates into the Zimbabwe 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 who have been out-doing each other buying each other’s shares need to revise an escape route in good time. Big Brother has been watching whilst companies were engaged in systematic corporate cannibalisation, where-by 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, Big Brother will ensure they comply.

The size of the 'global stock market' is estimated at about US$51 trillion (Zimbabwe’s stock market is currently worth US$4 billion). The world derivatives market has been estimated at about US$480 trillion 'face' or nominal value, 30 times the size of the U.S. economy and 12 times the size of the entire world economy.

Stock exchanges have multiple roles in the economy, this may include the following:
- Raising capital for businesses,
- Mobilising savings for investments
- Facilitating company growth
- Redistribution of wealth
- Corporate governance
- Creating investment opportunities for small investors
- Government capital-raising for development projects
- Barometer of the economy.

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 US$ and in Z$ 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, depression, 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 policy keeps 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 Big Brother 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 stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).

A stock market crash is often defined as a sharp dip in share prices of equities listed on the stock exchanges. There have been famous stock market crashes that have ended in the loss of billions of dollars and the destruction of millions of lives. Notable stock market crashes include the Wall Street Crash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000 and the Panic of 2008. But those stock market crashes did not begin in 1929, 1987 or 2008. They actually started years or months before the crash really hit hard.

One of the most famous stock market crashes started on October 24, 1929, on Black Thursday. The Dow Jones Industrial lost 50% during this stock market crash. It was the beginning of Great Depression. Another famous crash took place on October 19, 1987 – known as Black Monday. On Black Monday itself, Dow Jones fell by 22% after completing a 5-year continuous rise in share prices.

Black Monday was a day on which a significant dip by 22.6% in the Dow Jones Industrial for the entire history was witnessed. This event had not only shaken USA but quickly spread across the world. Thus, by the end of October, stock exchanges in Australia lost 41.8%, Canada lost 22.5%, Hong Kong lost 45.8% and the Great Britain 26.4%. Names “Black Monday” and “Black Tuesday” are also used for 28th and 29th October 1929, which followed the Terrible Thursday – starting day of the stock market crash in 1929. The crash in 1987 raised some mysticism – main news or events did not precede the catastrophe and visible reasons for the collapse were not identified.

One of the many things people always want to know about the stock market is, "How do I make money investing?"

There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analysing companies by their financial statements , business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects.

In Zimbabwe currently, it’s almost impossible to do any proper analysis of a stock due to inconsistent policies and ever changing operating environment. Investors have been forced to just buy whatever shares are available. This has its dangers as explained.

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 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 investors because investors were in desperate need of legal means to beat inflation.

Whilst authorities may want to punish or penalise the winners, this would be ill-advised. Now that a majority of Zimbabweans are aware of the benefits of investing on the stock market, the authorities should look at ways to encourage this trend.

Funds invested on the stock market can easily be taxed which would be beneficial to the state and the economy as such taxes are re-invested in the economy.

In addition, the financial authorities can use the current ZSE craze to introduce a small cap market which will list smaller enterprises. Clearly, there is enough money floating around looking for decent destinations. Such an exchange will allow small enterprises to access funding at lower rates. This will broaden and deepen Zimbabwe’s financial market.

This market would be similar to London’s Alternative Investment Market (AIM). This market attracts small and new businesses allowing them to raise capital and their profiles. This is something that Zimbabwe desperately needs and conditions are ripe for its set up.

In addition to this, Zimbabwe’s stock market may need to approve the blank cheque I.P.Os. Once seen as deals of questionable quality, blank cheques are essentially empty shells that generally give themselves 18 months to two years to acquire an operating company with the proceeds from an IPO. There were 66 initial public offerings of blank cheques -- also known as special-purpose acquisition companies, or SPACs.

The increasing popularity of the structure marks a stark change in the deal-making environment. Blank-cheque companies are like private-equity firms in their mission to acquire operating companies. But private equity, a rival for acquisitions, has been stung in the past few months by strains in the corporate debt market, which they rely on heavily for financing.

Blank cheques, by contrast, turn to public stock markets for cash, and issuance has kept going strong. Some investors like them because the structure offers a quicker route to cashing out of their investments than does private equity. This is ideal for a market like Zimbabwe where there are so many companies closing down. A blank cheque I.P.O could be set up to acquire such companies, consolidate them and list them on the proposed smaller market.

A stock market bubble is a type of economic bubble taking place in stock markets when prices of stocks rise and become overvalued by any measure of stock valuation.

The two most famous bubbles of the 20th century -- the bubble in American stocks in the 1920s and the Dot-com bubble of the late 1990s -- were based on speculative activity surrounding the development of new technologies. The 1920s saw the widespread introduction of an amazing range of technological innovations including radio, automobiles, aviation and the deployment of electrical power grids.

The 1990s was the decade when Internet and e-commerce technologies emerged.
Thus, sometimes, people will dismiss concerns about overpriced markets by citing a new economy where the old stock valuation rules may no longer apply. This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of finding a greater fool. This is called the greater fool theory. In simple terms, the investor is saying: “I am foolish, but however, there is someone out there who is more foolish than me.”

In financial markets, a stock market bubble is a self-perpetuating rise or boom in the share prices of stocks of a particular industry. The term may be used with certainty only in retrospect when share prices have since crashed. A bubble occurs when speculators note the fast increase in value and decide to buy in anticipation of further rises, rather than because the shares are undervalued. Typically many companies thus become grossly overvalued.

Zimbabwe’s stock market can’t be described as overvalued. Due to the rapid Z$ 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.

According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this largely theoretic academic viewpoint also predicts that little or no trading should take place— contrary to fact— since prices are already at or near equilibrium, having priced in all public knowledge).

Research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. In the present context, this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.

Another phenomenon — also from psychology — that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.

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! Inexperienced investors rarely get the assistance and support they need. The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market (and later amplified the gloom which descended).

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.

Gilbert Muponda is a Zimbabwe-born entrepreneur, living in exile. He can be contacted at gilbert@gilbertmuponda.com

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