Taking Stock with Kudzanai Sharara
This past Wednesday as I was writing this column, we were already halfway through the month — the 14th of April 2021.
The Zimbabwe Stock Exchange (ZSE) was having it tough and at a market capitalisation of $485.7 billion was trading 8.64 percent lower than its closing level in the previous month of March.
In contrast to last year, where March was a troubled month, closing lower than the previous month of February, this year, April seems to be the troubled month, so far.
During the month under review, the ZSE market capitalisation reached a peak of $531.7 billion but has since shed those gains and retreated into capital losses.
But what does this bearish trend on the stock market mean?
General market conditions, such as a declining market can be caused because investors are feeling less confident in the ability for stock prices to grow in the market. At peak levels, the market could be correctly priced or even overbought/overvalued. The stock market must reflect the intrinsic value of underlying companies.
At a valuation of above US$4 billion, the stock market might as well be overvalued. Yes in 2013, 2014 , 2015, 2016 and 2017, the ZSE market capitalisation might have reached valuations of US$5 billion or even US$6 billion in July 2013, but over the years it has also seen some companies delist. Old Mutual, PPC Limited, SeedCo, and others no longer contribute to the overall market cap as they are delisted. This means the US$4 billion-plus market capitalisation could be the correct valuation.
But that’s not the only reason why the market could be coming off.
The other reason could be the market was overvalued and is now cooling off through profit taking. There are investors who, for example, bought CBZ shares when it peaked at an all-time value of $85 per share with a 2020 year gain of more than 12 000 percent. Those shareholders could be taking profits and in the process suppressing share price movement for the counter.
Apart from profit taking, the other reason for a stock market downturn could be a change in circumstances such as inflation outturn and expectations. At times the stock market is used as a hedge against high inflation or currency depreciation. This seemed to be the case last year. But with inflation slowing down to as low as 2.4 percent in March, month on month, and 240 percent, year-on-year, the stock market might not be seen as a hedge and cash rich institutions and individuals might look to deploy their cash in other productive ventures.
We could also look at company specific fundamentals. How does the now lower revenue, lower sales volumes, eroded asset base, low capacity utilisation affect stock valuations?
What of liquidity? Is there still so much money looking for an investment home. With the economy now largely trading in US dollars and banking sector deposits now reflecting a higher value in USD deposits, how much local money is there to chase shares on the stock market? The short term insurance sector for example received 64.06 percent of Gross Premium Written for the year ended 31 December 2020 in US dollars. More than US$67 million was collected. Where is this money being invested? The equities market which had a contribution to overall assets of 18 percent while cash holdings and money market had 14 percent in the second quarter of 2020, closed the 2020 fourth quarter with contribution to overall assets of 13 percent while cash holdings and money market investments increased to 17 percent.
Buy, Hold, Sell
For stock market investors, there are only three choices to make. Buy, Hold, or Sell. Naturally, a market downturn triggers any of these three actions. A market correction as currently being experienced on the ZSE could be a buy signal to some while others will be panicking and selling. Others will just hold their current positions. What is key in all this is the long-term perspective of the investor. There is a need to better assess the long-term growth of the market and the stocks. A part of this long-term approach is a keen understanding of one’s own risk preferences.
Of course, knowing what you’re buying is just as important as knowing your risk appetite. Nothing sparks buyers’ remorse like realising you’ve got yourself a dog (poor performing stock). No listed company is perfect, but some are a lot closer than others. Giving emotions too much power during the stock purchase process can lead investors astray. A currently rallying stock might tempt you to overlook the poor fundamentals of the business.