eBusiness Weekly
Kudzanai Sharara
Taking Stock
On February 18, 2022 the Zimbabwe Stock Exchanges All Share Index reached an all-time high of 15 228,52.
This was after the market had gone through a 15-day rally that started on January 31, 2022.
From the record levels, the market started coming off till February 24. Trading then became see-saw till March 7. But since its peak till the 16th of March, the market has recorded eight consecutive days of losses.
From a peak level of 15 228,52 on February 18, 2022 to 14 284,9 as of Wednesday this week, the market has dropped 6,2 percent.
Analysts and investors have described the downward trend as a market correction while others are calling it a bear market.
What is it then?
Is it a market correction? There’s no universally accepted definition of a correction, but most people consider a correction to have occurred when the major index on the stock exchange, in Zimbabwe’s case the ZSE All Share Index declines by more than 10 percent (but less than 20 percent) from its most recent peak.
It’s called a correction because historically the drop often corrects and returns prices to their longer‑term trend. As highlighted above, the market has only lost 6,2 percent and thus still comes short of being defined as a market correction.
If the market turns before the drop gets to more than 10 percent, then it cannot be described as a market correction. At best we could say the market was taking a breather before resuming its long term trend. It could just be suffering from profit taking following a very strong rally in February.
In general, a stock market entering a correction is usually a short-term move, lasting for a few weeks to a few months.
Corrections normally happen after a major event in the economy prompts investors to pause, take a step back and consider what’s happening in the wider economy before making their next move.
The Reserve Bank of Zimbabwe’s announcement that it wants to keep a much tighter leash on money supply could be a factor causing the market decline. As part of its resolutions, following a meeting held on February 25, 2022 the Monetary Policy Committee resolved to ensure continued synchronisation of Government payments and market liquidity positions in order to foster strong adherence to quarterly reserve money targets and manage inflation expectations.
The stability on the parallel market could be an indicator that the central bank has this time kept its word to keep money supply restricted.
When liquidity is tight in the economy, investors look to liquidate their stock market positions to fund their other ventures. This could lead to the stock market coming off like what is being experienced now. Disappointing economic data reports can also cause market correction.
In a correction, investors are still optimistic about future earnings and the economy, so they come back into the market to pick up shares at lower prices, pushing the market back higher. Some financial advisors would encourage investors to buy the dip.
However, nobody can predict with any degree of certainty whether what is being experienced on the ZSE is a market correction or a bear market.
The downward trend currently being experienced might reverse or turn into a correction. Worse still it might continue and become a bear market.
However, since the ZSE’s trend is yet to be defined as a market correction, automatically it cannot be defined as a bear market. A bear market is a time of contraction on the stock market. It is typically defined as a period where prices have fallen 20 percent from a recent peak. In other words, a bear market is a deeper, longer decline in value than a correction.
A market correction can turn into a bear market if there are more significant underlying issues influencing the market.
While a correction represents a moderate amount of concern about more immediate events, a bear market is more about deeper, more impactful issues that could be lasting, like an economic crisis.
In a bear market, investor sentiment is more negative and even after prices have fallen, investors aren’t sure they want to take a chance and invest. There is fear that the dip will continue dipping.
What to do?
As much as it is natural that investors would be concerned if stock prices fall, excessive worry during a correction or bear market is counterproductive. It shows lack of planning as well as lack of an investment strategy. When investments are well thought out and informed, there would be no room for panic.
A financial plan can help craft an appropriately balanced portfolio. This helps calm nerves and make it easier to stay the course when markets get bumpy. Investors must also know their risk levels, and take up investments that are in line with their emotional and financial capacity. That way, they are unlikely to make emotional investment decisions during a correction.
Regular rebalancing of one’s portfolio is also key. It’s important to rebalance one’s portfolio and keep their risk profile intact and appropriate.
Rebalancing means selling positions that have become overweight in relation to the rest of the portfolio, and moving the proceeds to positions that have become underweight.
Understand what’s causing the correction or bear market is also key. Investors need to understand the economic developments that are impacting broader stock markets into a correction or bear market. This will help in taking appropriate action amid doom and gloom.
