Zimbabwe Stock Exchange – when will the music stop?


In my opinion, we may have hit the top of the cycle.

Black swans are events or occurrences that deviate beyond what is normally expected of a situation and are extremely difficult to predict.

Just as in the case of the 2008 financial crises, it is black swans that often trigger corrections and crashes.

Below is an attempt to be as encompassing as possible in identifying potential events that could poke holes in the current bubble.

The idea is not to be overwhelmed by thinking about the number of things that could go wrong but to have some balance in one’s decision making.

• Liquidity withdrawals – in the last four months most pension funds and money managers have moved funds from bank balances and TBs into equities. In an event of anticipated or forced redemptions, managers will look up to the equities market for liquidity and withdrawals. If the cause of a sale is affecting a number of funds at the same time or a large pension fund, the sale may spark a domino effect as speculators rush to be the first out of the door.

• Risk off event in RTGS and other assets – a major part of the rush in equities has been devaluation of RTGS against hard currency. The prevailing discount is a risk-on case, which reflects an aggregate of market participants’ fears. But we all understand that this discount is neither correct nor wrong but mostly a reflection of the market’s perspectives in this case – trust in monetary policy. This discount, is a highly fallible figure that can be drastically changed by a single political/policy event, announcement or act. Such an event would re-rate the risk attached on TBs or RTGS securities drawing funds from equities into deserted asset classes such as TBs and Bank balances.

• A return to fundamentals – less likely but plausible is a possible gradual return to sensibility. Where a few courageous funds will question the current prices and trigger respect for the fundamentals.

• Leverage – it is not unthinkable that seeing the stock market double in 3months some players in the market may be leveraging stock purchases. Few months back, regulators allowed investors to borrow against their listed shares. For leveraged purchases, significant drop in price could trigger a situation akin to margin calling leading to forced selling.

• Negative news in a blue chip – as Nassim Taleb puts it “it is contagion that determines the fate of a theory in social science, not its validity”- yet contagion is one of the least recognised phenomenon. Negative news in the performance of a share or underlying company is good enough reason to spark a market wide crash. It can be news unrelated to fundamentals such as Econet’s share price plunge when investors protested the rights issue terms. Speculators will jump at the sound of panic setting off a negative chain reaction across the market. Bear in mind, speculators are not interested to understand what is driving the share movement more than they are interested in the movement itself.

By Ray Chipendo for The Source


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The Insider

The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.


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