Stock market Part II: Case for equities
can choose from. Over the same period, there are a number of stocks that have posted positive gains. More critical is the need to invest in solid businesses, with strong management, brands and good cash generation. While in the short run, the stock market can be volatile and unpredictable, empirical evidence shows that equities are the best form of investment in the long run.
In addition, the most important driver of future returns from any investment is the price you pay at the outset. In other words, valuations matter more than growth prospects. It is not the absolute level of growth that determines an investment outcome but the extent to which it is in the price when you buy. Because of the currently depressed stock market prices, this presents an excellent entry opportunity for bargain hunters. The probability of investing in a rising star is greatly improved when prices are this low, provided they are financially sound and well managed. There are an abundance of such companies trading on the ZSE.
You invest for dividends While on average, general company profitability has been on a decline, listed entities have continued to pay dividends in some instances increasing the payout ratios. Most (well run) companies engaged in capital expansion projects soon after dollarisation, to retool their businesses after decades of decay, such that at the moment most of the profits are passed on to shareholders as dividends. BATZ just paid 100% of its earnings while Delta, in addition to their normal dividend, also paid a special dividend to their shareholders. This was despite the fact that both of these companies have witnessed declining profitability.
Furthermore companies like CBZH and Econet have, in addition to the dividends distributed, engaged in share buyback programmes, further passing on cash (a form of return) to shareholders. In addition to providing investors with a return, a company ‘buys back’ its shares if it feels its shares are undervalued and because the company is bullish on its current operations.
A high level analysis shows that there is currently an attractive dividend yield on the ZSE vs. the currently prevailing low interest rate environment. The ZSE as a whole has an average dividend yield above five percent, which not only is high by any standards but higher than some interest rates offered by the solid first tier banks. You can actually view these dividends as a variable coupon paying bond with also a changing face value. Again, as mentioned above the key is stock selection, just like you will not place any of your funds with some banks since you risk losing your principal and missing out on the interest payments.
While for smaller players, the dividends might be little because of the smaller outlays involved, the same applies to fixed income investments. If you need a higher interest payment, you need to put in a sizeable principal investment. The good thing with the stock market is that it offers an upside potential to the principal in addition to the ‘interest’ payments.
Cash flows, power, control and influence In any business, whether a start-up or an existing behemoth, you only invest so you can reap rewards in future; which in most instances are very uncertain. More so, before you engage in any business activity you undertake some research to determine feasibility, risks, and so on. That same approach also applies in equities investment and even sweeter, someone can do the due diligence on your behalf! Invest in a business you understand that also has good prospects (and mind you, there is a huge difference between investing and speculating).
While control and influence are also some of the major desires for investors, they are not the ultimate. The ZSE and Securities and Exchange Commission of Zimbabwe have also put in place mechanisms to protect minority investors against abuse by major shareholders. As a shareholder, regardless of your stake, you have a right to determine how your company is run through participation and voting in Annual General Meetings. This is one area that has been neglected by investors in Zimbabwe as they tend to be very docile.
In conclusion, while the stock market might not be an ideal investment for each and every investor, it is important to consider it as an alternative so you can diversify your portfolio and also access returns or benefits of being a share (stake) holder in a bigger entity with economies of scale. Over time, equities can provide opportunities for growth in a diversified portfolio and help preserve purchasing power.
The writer gave an example of returns a fixed income player could have achieved since dollarisation. While that analogue could be true, there is a risk that the investor could have lost their money through Ponzi Schemes, bank collapses (we have had a number folding!), and so on. Now, I see risk as the permanent destruction of capital.
A decline in the stock market is a short term loss in capital but it is not a permanent loss of capital. Holding money market assets in hyperinflationary times amounted to a permanent loss of capital. Holding money market assets in the current environment might result in a permanent loss, but holding real assets like equities does not result in such a loss.
IF YOU LIVE IN BYO PLEASE CONSERVE WATER. IF YOU LIVE IN ZIMBABWE PLEASE USE ELECTRICITY SPARINGLY: SOS (SWITCH OFF SWITCHES). IF YOU LIVE ON PLANET EARTH PLEASE PRESERVE THE ENVIRONMENT.