“Stocks on steroids”, “irrational exuberance” are some of the market lingo used to define the prevailing record breaking ZSE rally that clearly looks unabated. Say what you may, it is what it is. The ZSE’s industrial index, which measures stocks movements on an aggregated weighted basis, has gone up by a staggering and shocking 82% since the beginning of the year. Theoretically this means investors with an evenly balanced portfolio spread across all industrial stocks on the ZSE have realized a return of such magnitude (82%) from their investment. This is a phenomenal gain by any measure and for context a return on a money manager’s portfolio of 20% is regarded as outstanding all else being equal and it equally beats average property yields and fixed assets ( money market) returns on a normal portfolio.

For further context the 82% gain is the highest when compared to prior years' outturn for the ZSE, since 2010. The best yearly outturn was a 33% gain in 2013 followed by a 27% gain in 2016. In 2012 the index eked out marginal gains of 4.5% while faltering in the outstanding 4 years. The worst yearly outturn was a -29% return in 2015. When compared to the region the ZSE is by far the best performing year to date while globally it is among the best 5 top performing markets in the 8 months period to August. What this shows is that 2017 will be an extremely outstanding year for the ZSE in the post dollarisation  era.

Which stocks pushed the market high?

A total of 49 stocks out of the active 59 counters listed on the ZSE have all gained since January and these include 9 of the top 10 top capitalised stocks on the ZSE. Top capitalised stocks carry more weight on the index and therefore their movement has more impact on the direction the overall market takes, than the average stocks. So, if 9 stocks of the top 10 capitalised are up and all of these having gone up by double digit growth rates, its implies a far much more higher growth for the overall industrial index. Among these stocks are Delta which is the top capitalised stock on the ZSE, Econet an investor favourite, Old Mutual a stock with fungible characteristics, Simbisa and Seedco which are eyeing secondary listings and regional expansion.

But overall mid to small tier counters which are obviously coming from very low bases are among the top risers. For example General Beltings whose financial performance is improving but remains in losses, is the year to date top riser with a gain of 587% followed by yet another loss maker CFI which is up by 516%. CFI an agro industrial concern generated significant investor appetite following the offer by then top shareholder Starlap which was countered by Messina, the second top shareholder. ZBFH which is likewise a subject of shareholder contention is among the top risers having notched by 309% year to date. The company unlike those before it is a profit maker. Other notable top performers YTD include Hippo, Simbisa and Axia.

Is the rally sustainable?

The question of whether the rally is sustainable or not has been posed since the beginning of the rally, and for fundamentalists, the answer has largely been a no. The argument is that company earnings do not support the valuations brought about by the raging rally. The persuasion under this notion is that a company should be valued in line with their present as well as projected performances. From looking at the average market, the performance has largely been depressed although recent financials shows an improvement. This improvement is largely due to organic alterations of companies’ cost bases in an effort to salvage weakening margins. It is not necessarily topline driven which means it has a break point upon which further tweaking of the cost base becomes sticky. So if this bump is moderated for, the outcome is stable to depressed company performances.

However what most fundamental analysts ignore at least at face value, is that the behaviour of the broader economy is part of fundamental analysis of a company. While the economy had largely been depressed, the alterations of the economy’s monetary system to accommodate a local “currency” did not augur well with a wide section of investors. Investors now see increased risk with more liquid assets which are under the money market and yet, the spread had been more even between the money and equities market over the years, even as the tendency towards money market grew over the past few years. Risk averse investors do not trust monetary authorities with the money machine, for lack of better vocabulary. Or suppose they do, numbers regarding government’s local debt exposure and increased appetite for same, charged bond notes release and an upcoming election are compounding factors driving hedge seeking investors to real assets which carry less risk.

The stock market rally is therefore likely to vary directly to government’s appetite for debt, release of more bond notes and election timing. This however clearly shows that the gains are short term. Prior to dollarisation the ZSE went on a rampant as savvy investors sought umbrage and bargains on the ZSE, in a bid to beat the hyperinflation. These gains were not driven by company specific fundamentals but economic fundamentals. In the long term though, the 3 variables will have to vary in sync, such that a good economic performance will inspire a good company performance and in turn the company’s share price will follow. If this holds it means the stock market gains will not last forever, stocks will have to rerate downwards in the mid-term or companies will be demanded to grow at very fast rate to justify valuations.

*The writer holds shares in some of the companies mentioned in the article, in his personal capacity.