eBusiness Weekly
Kudzanai Sharara
Taking Stock
The Zimbabwe Stock Exchange’s (ZSE) market capitalisation reached $1,812 trillion on Wednesday this week.
This is a 37,5 percent gain from last year’s closing levels of $1,317 trillion.
In US$ terms, which makes it easier for comparison with other markets, the ZSE valuation as of Wednesday was US$15,3 billion using the official exchange rate and US$7,5 billion using a parallel market exchange rate of $240 per US$1.
Last year’s closing value using parallel market rates of between $210 and $200 was US$6,27 billion and US$6,6 billion.
This means the market has gained approximately US$1 billion or 15 percent (in US$ terms).
It is safe to say the market has rallied beyond expectations considering the strong gains recorded in the last two years.
As expected, in a bull run, people begin to ask questions on whether the market is now overvalued or still has some headroom.
Buyers are now more risk-aware. Is the market not too hot to be buying? Is it time to sell? Either of the two decisions now has a very high opportunity cost to consider.
The decision to buy or sell can easily be damned. There is a very thin line between leaving money/gains on the table and losing money.
There is an increased risk of buying at the top in a market that is about to correct. A market correction is a 10 percent drop in stocks from their most recent high.
There is, however, also risk of selling off in a market that will continue to rally further into unchartered territory.
The stakes of losing money are thus very high whether one is on the buying side or on the selling side.
What to do?
There is need to analyse trends. Looking closely, strong gains are more confined to the Top 15 stocks by market capitalisation as evidenced by the ZSE Top 15 Index which is up 45,74 percent.
This is where prices are heating up. Chances are that this is where profit-taking and market correction is likely to take place.
Buying such stocks is risky. Buying opportunities are likely to be in medium cap counters where the Medium Cap Index has gained just 19 percent.
Funds from a sell-off in big-cap counters are likely to look for a home in these medium-cap counters.
Small-cap stocks could also be an option, but there is risk these overrun last year and are already overvalued even as the Small Cap Index is 1,87 percent in the negative.
Another way of approaching the runaway market is to stick to businesses that can withstand different economic environments and that can perform in both high-inflation environments, low-inflation environments, and so forth.
No one can guess what inflation is going to do through the course of this year so decisions should be based on company-specific fundamentals only. A very simple approach is to identify good businesses and try as much not to overpay for it. Good businesses are those run by management teams with a good track record.
There is also need to look at the balance sheet and make sure the company is not heavily indebted. Companies that are highly profitable, that can turn their revenue into cash are also attractive.
Another method in these times is the dollar-cost averaging strategy. Using this method one can either have a fixed amount to invest periodically as a lump sum or break orders and buy more when prices fall.
By doing this, one eliminates the need to time the market which is a risky and difficult exercise even for the most adept.
For example, using the dollar-cost averaging strategy, buy orders can be lumped on a certain day of the month, or one can break down the figure and buy every week. Buying every week allows the investor to reduce risk and losses if the price goes down after the first buy. If the price goes up after buying, at least one would enjoy some of those gains although the next buy will be at a higher price.
On the other hand, buying as a lump sum offers high returns but also high risk of losses. While dollar-cost averaging is a great strategy, it is not a substitute for doing research about companies and understanding them.
The strategy should only be adopted with proven companies that have a healthy track record and will be around for the long run.
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