Taking Stock Kudzanai Sharara
Old Mutual Zimbabwe believes the rally that is currently prevailing on the local stock market is being driven by investors looking to preserve value.
As of Wednesday, the ZSE’s main industrials index was up 31,44 percent year-to-date with most of the gains having been gained between Wednesday last week and Wednesday this week.
To put it correctly, the main industrials index had a year-to-date gain of just 3,01 percent last week, but had jumped ten times more by Wednesday. That’s phenomenal growth by any measure US$ or in RTGS$ terms.
To put it into context, across the African continent, the Nairobi Stock Exchange with an 8 percent year-to-date gain comes second after the ZSE. The rest are in the red or have recorded marginal gains.
This, however, raises many questions. What’s driving the market, has value been created in real terms, and what should investors do going forward?
The answer to the first question should be a no brainer to many people. There is flight to safety as inflationary pressures and currency weaknesses are now more pronounced.
While threats to monetary values have been lingering for long, last week’s decision by the central bank to wean off fuel dealers from accessing foreign currency at a 1:1 parity among other measures seem to have triggered market panic.
From February, the RBZ has had its hand directly and indirectly in determining how exchange rates are determined in this country. Part of the invisible hand was removed last week, with the RBZ saying in a statement “the 1:1 exchange rate that was being used by Oil Marketing Companies (OMCs) for the procurement of fuel will be discontinued with immediate effect”.
With this statement the full abandonment of the 1:1 parity with everything now pegged at the interbank rate which seemed to have been restarted at 4,61 times to the US dollar.
Also part of the statement was the directive that “banks should discontinue twinning arrangements for their customers as this undermines the efficient operation of the interbank foreign exchange market”.
For some reason, this move, which was received with mixed reaction by the market, seem to have had a negative impact on the exchange rate, as holders of foreign currency, who seem to have been comfortable making twinning arrangements at rates below 5 times to the US dollar shifted goal post and now want more.
Parallel market rates were anything above 7 times to the US dollar on Wednesday while the official rate had moved to 5,16 times to the green back. As baffling as it is, what is clear is that investors on the stock exchange were spooked by something and are looking for a home in stocks.
Investors normally deploy the value preservation strategy when inflation pressures or economic uncertainties are heightened. Investors usually minimise exposure to monetary assets through investing in real assets which tend to preserve value during periods of excessive inflation.
According to Old Mutual’s month of May Newsletter, the current rally in the stock market, “is driven by investors looking for an investment vehicle capable of preserving value amid rising inflation currently at 75.86 percent in April (highest since 2009) and currency uncertainties as depicted above”.
The immediate future is not offering anything better, with Old Mutual saying concern about rising inflation and the associated loss of RTGS$ value is expected to continue to drive the demand for shares and push prices upwards.
Apart from stocks, safety or comfort can also be found in the property market.
Inflationary pressures that are currently being experienced also support upward movement in property values. Although valuations are currently depressed due to low rentals, future returns are expected to reflect property revaluations in line with the depreciation of the RTGS dollar against the US dollar.
Is there value creation?
The second question which we have tried to address on this column before, is whether one is getting value from ballooning stock prices, or it’s just a false impression on performance.
Analysts are divided on this one, with some saying you are still losing value even if you buy stocks while others believe stocks are actually undervalued if you are buying using RTGS balances, which are now being significantly discounted against the US$.
If the currency is nearly valueless, then the one buying an entity with strong assets, brands, patents, business model, is gaining while the sellers are the losers. There is also an argument that some of the ZSE stocks are probably still undervalued in RTGS terms.
Using Delta as an example, Wednesday’s price of RTGS$3,71 is worth just US71,89c. Historically for Delta, 72 cents points to an undervalued stock as it has traded at US$2,52 before.
Another argument that has been put forward is that if we are discounting currency, doesn’t it follow that we also have to discount the kind of earnings or cash flows that a company is generating. It’s a muddle.
So what should investors
When the market surges, it is easy to get caught up in the financial frenzy and be tempted to sell your stocks that are up.
When the market soars, it’s not necessarily time to sell. When the market collapses, it’s not always time to buy, is the simple answer.
What everybody should understand about the stock market is that it has its own forces at play; nobody can control it. Every day, investors make decisions on what they want to pay for any stock and what you simply have to do is to stick to your strategy. Hope you have one. Happy investing.