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The Zimbabwe Stock Exchange is the top performing equities market in the world having gone up 163 percent year-to-date as of Thursday last week, with the main Industrials Index closing at an unprecedented 379,95 while the Mining Index had put on 45 percent to 84,65.

At the close of business last Thursday, the ZSE’s total market value had shot to $10,7 billion, a 40 percent surge within a week and three and half times what it was worth two years ago, and more than twice as much from nine months earlier.

This is about 76 percent of the country’s GDP.

From the above statistics, it seems stocks have created more “value” for investors in just eight weeks of frenzied buying than they did for the whole of 2015 and 2016 combined.

But then, for lack of a better term, this is false optimism.

The MSCI Frontier Markets Index, a global barometer on equities activity in emerging economies, said a month ago the ZSE had overheated by more than 35 percent.

By now, in view of the 163 percent year-to-date surge in industrials, this “heating” has expanded.

Investors are buying hot air, the MSCI data suggests, driven by an all too common desire to make quick money, and to protect against currency and economic uncertainties.

ZSE figures support this view. Sailing on a bourse whose PE values have cruised beyond 50x, the high-performing listed companies are clearly not worth half the value what the market currently thinks they are worth.

In a tentative throwback to the market “madness” of 2008, at the height of hyperinflation, when the Industrial Index often soared by as much as 250 percent in a day’s trade, in real US dollar terms, equities have in recent weeks averaged a growth of 5 percent each day.

Time for a cautionary tale

The most common reason why most local investors, who are dominating activity on the bourse, have been giving is that they are looking for a safe haven for their bank balances and one cannot fault them for that.

Bank balances have been losing value by each passing day as companies and individuals cannot effectively deploy them into the productive sector.

Cash-rich companies such as listed entities Delta and Econet would tell you they would have loved to reinvest their earnings into the business, but that has been made difficult by failure to access foreign currency.

These companies would have considered holding on to the cash for future expansion projects or acquisitions, but with banks paying little or no interest at all on term deposits, the companies are finding no use in keeping cash.

Value is also being lost. To access cash, one has to pay a premium upwards of 30 percent.

To that end, the bank balances have been discounted by more than 30 percent. As a result, cash-rich companies and individuals have been rushing to the stock market as they try to get rid of bank balances.

Recently, we saw Econet increasing its share buyback threshold in an effort to preserve the value of its cash resources.

Pension fund managers and insurance players must be doing the same, buying into stocks, with the common mantra being the market is a safe haven against currency risk.

But given the extent and the strength of the rally, has this not become another risk that needs to be hedged against? Isn’t there a possibility that investors have actually created most of the risk in the marketplace by inflating stock prices beyond the value of the underlying companies and even beyond the value of real US dollars?

Is it still wise to be investing pensioners’ contributions and policyholders’ funds at such stratospheric levels? What are the chances of the market crashing when the currency fears subside?

These are some of the questions fund managers should be asking themselves. But the replies from most is that the stock market is a better devil than the currency risk.

Another common reply has been, “If you are a fund manager and think that the market will crash and not invest, what if the market does not crash?”

This is as good as saying the fear that is driving fund managers towards the stock market will not end. But all things eventually come to an end, this rally and the fears behind it will at some point stop and investors will have to look at the value of the underlying company.

The questions current buyers must be asking themselves is who will be on the buying side when fundamentals start showing that the underlying company is overvalued?

No one would want to buy, and there would be a stampede to sell. There are those who bought Old Mutual at $1 and those who are buying at $5 or more. It’s easy to see who will win this battle. – Sunday Mail

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