Stock market inefficiency on ZSE and investment
SHARE prices on the Zimbabwe Stock Exchange (ZSE) are known to be trend following due to price inefficiency. Wide researches on the efficiency of the local bourse, spanning more than two decades since the 1990s to date, reveal that the market is inefficient in the weak form.
Such existence of market imperfections on the ZSE bring about opportunities that investors can exploit at a profit. This suggests mispricing of shares on the ZSE. Some investors who possess better information than others can possibly outperform the market and earn above normal returns. This condition is not peculiar to Zimbabwe alone. In actual fact, market efficiency is professed to be a useful model though hardly possible to achieve in reality even for advanced capital markets. Without exception, the United States capital markets have experienced seasons of share price manipulation.
The implication is that technical analysts can be able to outperform the market by using trading strategies that can earn them above normal returns. A good understanding of buy or sell indicators then play a vital role in informing the right strategy to take in a given situation. Amongst a host of buy or sell indicators, technical analysts can use are the Relative Strength Index (RSI), Accumulation Distribution (A/D) line, the Aroon Indicator, On-Balance Volume, Average Directional Index, the Stochastic Oscillator and the Moving Average Convergence Divergence index. Experienced stock market analysts have argued that these indicators work well when combined instead of using one indicator in isolation. When used together, different indicators provide stronger buy or sell signals since one indicator may serve to confirm another.
Stock market investment requires a thorough understanding of market dynamics. Research therefore becomes an indispensible tool for informed strategy when combined with the use of indicators. Generally, the economic outlook is dull and that has affected the performance of companies listed on the ZSE. Investing under such situations may not be easy. The use of technical trading skills does not guarantee continuous profit even to experienced traders. The key point is that when share prices do not move in a random fashion, then observable patterns and trends in the movement of shares can be exploited profitably provided the trading decision is taken timeously. Triggers and filters will then inform traders on when to enter or exit a market.
The onus is therefore to young investors for they are the country’s next generation to take an active role in the exploitation of such opportunities. Zimbabwean can transform its future economic fortunes if the young generation have a culture of saving and investing. A country that is a net consumer is predestined to fail. Ever rising numbers of vendors have spotted every street in towns and cities in response to the indigenisation and local empowerment call. In contrast, participation on the ZSE has been minimal. Analysts’ reports indicate that a majority of active investors on the ZSE are foreigners as opposed to locals. This is in light of professed low investor sentiment. Excuses based on bad economic outlook can never shape our future. All what is needed is a positive attitude towards investment in shares since the existence of risk on its own is an opportunity. “No risk no returns”, so goes the adage. This shows confidence and commitment to the future of our financial markets. This in turn will be instrumental in the attraction of foreign direct investment. Stock market alliances and integration can then allow us to learn from other stock markets.
Patience Hlupo is a lecturer in Banking and Finance at the Women’s University in Africa.
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