It’s a bear market, should we buy the dip?

As of Wednesday this week, the Zimbabwe Stock Exchange’s market capitalisation had lost 52,77 percent from its peak of $3,6 trillion.

That’s a good $1,9 trillion of value wiped from the market.

The current market capitalisation of $1,7 trillion though higher than the $1,3 trillion at the end of last year is much less in real terms.

The $1,3 trillion in January was worth US$5,9 billion using a parallel market rate of $220 per US$1, while $1,7 trillion as of Wednesday this week is worth US$2,2 billion using an exchange rate of $800 per US$1.

Using official exchange rates the market’s real value would be US$12 billion in January and US$3,2 billion as of Wednesday. In both cases, the stock market has lost significant value.

In market terms, the downward trend qualifies as a bear market. The bear market phenomenon is thought to get its name from the way in which a bear attacks its prey — swiping its paws downward.

This is why markets with falling stock prices are called bear markets.

On average, bear markets have taken 13 months to go from peak to trough and 27 months to get back to break even since World War II, according to Stann Choe and Alex Veiga reporting for Associated Press.

Bear markets are often the result of a more significant change in sentiment among investors.

Bear markets are more about deeper, more impactful issues that could be lasting, like an economic crisis, rather than just a handful of disappointing economic data reports.

With regard to the ZSE, it seems the market is suffering from persistent attacks from policymakers. For the past year or so, authorities have labelled the stock exchange as a haven of illegal activities.

Finance and Economic Development Minister Mthuli Ncube, in May described the rally that had characterised the stock market as a bubble that needed to be pricked.

The term “bubble” in the stock market context, generally refers to a situation where the price for an individual stock or even an entire market — exceeds its fundamental value by a large margin.

“We have information and we know some of the perpetrators that were using banks to borrow cheap liquidity; cheap in the sense of negative real interest rates, to speculate and take positions on the parallel market, but also root some of the proceeds on to the equities market and then just keep playing around the equities and parallel markets. So, we had to prick that bubble and this is how we decided to do it,” Minister Mthuli said then.

Minister Mthuli’s comments and the measures put in place, including a 40 percent Capital Gains Tax on shares sold before 270 days, have resulted in negative sentiments toward the market.

The ZSE is at the moment characterised by investors’ pessimism and low confidence.

Investors are simply ignoring any good news coming from listed entities, some of them reporting growing earnings and paying dividends in US$, by continuing to sell, pushing prices further down.

Since May the market has suffered heavy losses.

What has also fuelled the market sell-off, are key economic signals such as high inflation and interest rates which have slowed down economic activity.

A decline in economic activity and aggregate demand signals a decrease in corporate profits in the near future. So they sell stocks, pushing the market lower.

However, while bear markets are among the scariest market events investors will encounter, they can even provide good investment opportunities.

But what should investors focus on in order to benefit from bear markets?

Bear markets test the resolve of all investors. While these periods are difficult to endure, history shows the market will always recover.

In 2008, the ZSE was decimated, but by 2013 it had turned bullish with market capitalisation reaching above US$6 billion.

In 2019 the market was hit by new policies again with overall market value coming down to as low as US$1,1 billion but only for the market to recover to approximately US$6 billion by any measure.

The latest bear trend like the others before will not last forever. The focus should thus be on the long term.

What is key is not to invest money meant to achieve short-term gains and also not to yield to the temptation of selling stocks when markets plummet.

Another area to focus on is the investment strategy. Since no one can time the market, the dollar cost average strategy is the best.

Dollar-cost averaging is when you continually invest money over time and in roughly equal amounts.

This means you don’t have to worry about missing the point when the market bottoms and rallies again.

Stock selection and diversification is also good strategy. Investors could be well saved if they focus on sectors that tend to perform well during market downturns.

Firms that are into consumer staples usually weather bear markets better than others. Likewise, stocks that are well diversified by product or geographically are also good bets. Not forgetting those earning foreign currency. Happy investing.-ebusinessweekly