Investors need the smarts

BUSINESSWEEKLY

Last Word

WHEN the bears mangled a lot of portfolios on the Zimbabwe Stock Exchange after its temporary closure, one major reason must have been the sudden sharp drop in the expectation of future inflationary pressure following the stabilisation of exchange rates and prices in the wake of the auction system.

As inflation, and the expectation of inflation, rises, equities are an obvious shelter for those with liquid cash wanting to preserve as much value as possible but still retaining a degree of liquidity that is impossible, for example, with property, the other well-known refuge, and the difficulty of legally hoarding foreign currency and playing the currency markets, although at a lower level this is done.

So we saw some very aggressive bulls from May as cost-push inflation, driven by black-market exchange rates, took off. In a sustained bull market there will be plenty who reckon by astute trading that they can make some rather good short-term gains and even if a bubble may be forming can do the required sums and bail out before even the first wheeze of an air-leak is heard.

The temporary suspension in trading was a serious nuisance for the churners, although not for the long-term investors, stopping the churning and making the bail out impossible if you wanted fast liquidity. So that twitchiness also helped to feed the bears as the doors reopened.

The return of bulls in the last few days, in what looks like a significant recovery, is partly a correction, a belief that many stocks could be undervalued once the inflation that has been seen this year is taken into account, partly a realisation that most businesses have weathered the Covid-19 lockdown and loss of business far better than anyone predicted, and partly a trend of more knowledgeable and precise investors moving into the markets.

The most interesting point is that it is the smaller counters that are leading the rally and posting the larger gains. The prices of the real heavyweights have generally not been matching inflation this year, and while monthly inflation figures could well be very low for the rest of this year and next year, there was the bad belt of inflation seen before importers were moved into the auctions.

Some of this is obviously because of falling consumer demand, as a direct result of falling purchasing power. And that is likely to be a major medium-term factor since a lot of the economic reforms at the fiscal and monetary levels have been telling us that, as a country, we were pretending we had money when in fact we did not.

Some of it must be the potentially bloated costs of many of the older heavyweights, while the smaller and nimbler concerns are perhaps more ruthless is taking a knife to their costs. But it is an interesting point that the price rises in the largest companies are, on average, significantly less than the price rises in the entire exchange. When people bet, with real money, that there will be more growth in niche companies, reforming companies and newer companies it is in many ways a vote of confidence in our economy.

More intelligence in investment decisions will do no one any harm and if investors start studying annual and half-yearly reports, watching how consumers and other buyers are spending their money, and generally doing private analysis rather than just buying a ticket on the nearest train and following the herd, the Zimbabwe Stock Exchange will start doing its proper job.

A serious degree of stability in the economy, as we are now starting to see, will put a premium on such smarts. Any fool can make money on a stock exchange, in nominal terms, during a period of high inflation although few might be able to match inflation. But to make real capital gains, and pick up a bit of dividend income while you do so, requires a different approach.

This does not hit long-term institutional investors much. A large proportion of their portfolio was bought many years ago and they tend to like the blue-chips with their regular dividends, year in and year out regardless of drought, flood, cyclone, inflation and political policies. Churning is not a major activity and the annual addition in shareholdings is a modest percentage of what is already there. They need to keep a good look at what they have, and start making switches in modest blocks since you cannot just dump even one percent of something like Delta on the market in a couple of weeks without devaluing your portfolio rather significantly.

The long-term investors are already having to think how they can manage their property portfolios. The old days when you just put a new set of title deeds in the safe every now and then and kept your older stuff in good repair are over.

The major switch in business in Harare city centre in particular, although other large cities have seen this to a lesser extent, has given the major property owners a major challenge. The large high-rent tenants were a really first-class cash cow for the dairy farmers with good quality office and commercial space in Harare city centre.

Now that market is dominated by smaller companies, wanting lower rents. Added to that are the age factors. The city centre went through cycles of boom and bust. The booms of the federal era in the 1950s, the UDI period before the liberation war got going in the late 1960s and early 1970s, and the biggest of them all, the independence boom in the 1980s, have left a lot of well-built high-rise stock that now needs serious renovation or a complete rethink over conversion.

To this can be added Harare City Council, which believes that tens of thousands of people want to pay $50 an hour to park in the city centre, and despite the council offer of cheaper offstreet parking in the parkades there is not much left to rent. A stroll around the parkades will find the solid massed fleets of bankers, in particular, along with a scattering of other corporate customers, and very little left now for anyone else to pick up.

While parking floors did become popular in post-independence development, largely because the same city council had planners who made it a requirement, the adequacy of the space, even in some of the more modern blacks, is dubious. Part of this was because large numbers were still using public transport even into the 1980s.

The old Harare (Salisbury) United services were good, and even on nationalisation and incorporation into Zupco in the later 1980s did not wreck that service at first. The error of assuming that low bus fares, which could cover operational costs but not capital costs, was made then. But it still took several years to run down the fleets.

Now middle-income families automatically assume you need a car to get to work, and if you are in the growing number of office parks and private house conversions that have come to dominate the office sector, you are probably right. Sitting in Zupco buses, even those which pass by and through upper and middle income suburbs will give an indication of just who uses public transport. A trip on the Borrowdale route from Fourth Street reveals all; generally lower level service staff and a handful of eccentrics. The company buses now provided by the larger corporates that have moved out to locations on that route have taken some of the burden off Zupco, but also skimmed a good chunk of the lower middle-income formally employed.

There has been some imagination applied to inner city development, largely by the smaller owners who have designed or completely redesigned their properties to cope with the new breed of tenant. This has paradoxically given more value to lower-rise buildings that do not need expensive lifts but which have a modest amount of parking in the back yard. The city centre is not dying, but it is different with just a northern and eastern crust of the more traditional development.

As with equity investment, changes mean that careful thought and flexible minds are required.