Batanai Matsika 
BULLS have been raging on the Zimbabwe Stock Exchange (ZSE) while smart investors and traders have been smiling all the way to the bank.
On a year-to-date basis, the ZSE market capitalisation has gained 67,5 percent in USD-terms
Thanks to the $18 billion Covid-19 stimulus package, rumours of money printing and fears of local currency depreciation!
On a year-to-date basis, the ZSE market capitalisation has gained 67,5 percent in USD-terms (we applied parallel market rates as opposed to the interbank rate of 25). An analysis of stock market indices reveals that small and medium cap stocks have led the gainers on the stock market.
At a market capitalisation of US$2.1 billion, the big question is whether the stock market will continue going up or will start to cool off?
We carried out a market sentiment analysis of retail and institutional investors on the ZSE to get the overall tone and predict market direction. In the long run, valuations tend to drive stock prices, but in the short-term it is market sentiment that moves prices.
In our view, this can create investment opportunities for long- term investors to find attractive entry points and for active traders to both enter and exit positions.
Market sentiment analysis involves studying the overall attitude of investors toward a particular security or financial market. Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. Sentiment analysis is also one of the more successful methods of including the effects of market psychology in a trading strategy.
The rise of social media platforms gives many market participants the space to express their opinions. We made use of the piggybankadvisor.com and WhatsApp-based social trading platforms to gauge the tone of active retail investors on the ZSE.
For institutional investors, we sent out questions to the fund managers of major pension funds and asset management businesses. The question posed was simple; “Do you think the market will continue going UP or will go DOWN? Please text a line or two explaining why.”
Generally, market sentiment cannot be exactly defined or measured and there is no specific correct or incorrect way to conduct sentiment analysis. Some methods include the use of natural language processing, text analysis, computational linguistics and biometrics. We decided to do a text and key word analysis from the responses of the various market players. Below are extracts of the responses we got;
• The market will go up because of inflation…
• The market is still very undervalued…
• The stimulus package will be rolled out and will likely be inflationary…
• There are few investment options around…
• The general uptrend will persist…
• The psychology of the introduction of new higher denominations will push the market…
• Fund managers are reallocating funds from prescribed money market assets to stocks…
• The market will go up because of the currency depreciation…
• People have just about nowhere else to put their money in the short term…
• There is not much alternatives by way of preservation of value and return in savings…
• The vast majority of counters on the ZSE are undervalued even in hard currency terms…
• The rise is linked to an increase in inflation, so as long as inflation is rising the ZSE will continue to rise…
• The $18 billion package and RBZ excess printing of $10 and $20 notes will push inflationary pressures
The overall tone in the market is bullish. To sum up our findings, market participants are worried about (i) Zim dollar deterioration against the USD, (ii) inflationary pressures, (iii) limited Zim dollar preservation avenues, (iv) the impact of the stimulus package on money supply growth and (v) possible excessive money printing given the limited fiscal space in the wake of the Covid-19 pandemic. Another interesting view is that avenues of investing Zim dollar balances are limited due to low economic activity as a result of lockdowns. In addition, the tightening parallel forex exchange trading will result in more people using the ZSE as an avenue to “dump” their Zim dollar balances.
Sentiment analysis is often used as a contrarian indicator and investors can use it to determine when the market is being driven by emotion rather than by rational decision making.
Sometimes it may prove to be a good idea to go against the crowd and trade in the opposite direction of the prevailing consensus. For example, if everyone is buying, a contrarian would sell or take profits. Overall, we expect the market to maintain a bullish trend given the Zim dollar deterioration and concerns around inflation. However, it appears that medium and small caps have outperformed the big caps. Short-term traders can avoid a bull-trap by Switching from small and mid-caps into big cap stocks.
● Matsika is the head of research at Morgan & Co, and founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
