Harare — The year 2002 finally came to an end and will be remembered by most as eventful. Few will miss it. Some made fortunes others lost hard earned money as markets became unpredictable and crumbled. Nature did not smile on us either as erratic rainfall left many at risk of dying from hunger.

For stock market investors it was one of the most volatile year in the market's history, at least, since 1997, the last bear market. The stock market closed the year up 123 percent last year, compared to 158 percent in the year 2001. Inflation rose to 198.9 percent in December 2002.

What does this mean for investors? For conservative investors, especially those who kept their money on the money market - wealth was lost. Short-term interest rates were maintained at less than 35 percent in an effort to boost production and keep products affordable.

The result was speculative demand for foreign currency and increased consumption financed from cheap borrowing. It, however, allowed the Government to continue financing its expenditure.

For the aggressive investor who invested in selected stocks on the stock market, especially some middle tier stocks (the likes of Astra up 2671 percent, Apex up 2008 percent, Bicaf up 1566 percent and Truworths up 1477 percent for the year) it was time to smile all the way to the bank if they took their profits earlier than the dreaded 15th of November when the market went into a free-fall.

For those who thought the 2003 National Budget was to be a non-event it was time to resign to the unending nightmare. Not only did the Finance Minister announce that he would increase interest rates to tame inflation, he introduced measures meant to curb the further weakening of the currency.

Stricter control of FCA accounts was instantly implemented and investors who had looked to exporters as safe haven investors panicked. The price of some stocks such as Interfresh, TZI, Bindura and Cottco among others halved in just a few days.

Investors watched helplessly as their wealth was eroded. For over a month now the rumour that these policies will be reversed has been peddled on the market, but investor sentiment has remained poor, waiting for solid indications from the Government. The market has simply failed to take off as it did a few weeks before the budget presentation in November when it reached 132 000 points, a historic high.

What will change the fortunes for investors on the stock market this year? The speculation that the Government will reverse its policies announced in the 2003 budget continues with very little indication that this will materialise.

Some counters are 'dead' cheap, but the current uncertainty has kept investors off the market. The lack of significant activity on the market suggests that chances of policy reversal are pretty slim. Clearly, there is very little room to manoeuvre.

With national debt rising to more than $340 billion at the end of last year, increasing interest rates could result in a high debt burden and consequently increased borrowing by the Government to service the national debt.

With another drought clearly unfolding, the Government will still need to spend money to feed the nation. So interest rates may very well remain low unless the Government finds other ways of financing its expenditure.

I remember saying the very same thing last year, followed by, "Invest on the stock market as investors have nowhere else to turn to." Why am I not saying the very same thing this year? The country is at crossroads.

A lot of companies are threatened with closure as price controls, the lack of foreign currency, rising inflation, the drought and the lack of business confidence have hampered operations. The crisis is deeper than before and solutions are not any clearer.

Does that mean the stock market is dead? Not necessarily, however, investors need to be cautious and selective. Some brokers in their research notes have been advising investors to take the opportunity to average down their costs by buying shares on weakness. A word of caution must be sounded here. There is risk of putting good money after bad.

Investors must be able to look at a share and be comfortable with its trading prospects if they are to profit from this strategy. It is also important to adopt a long-term view of the market as failing to do so could result in serious losses.

In the developed world this has aided the case for investment in mutual funds (Unit Trust funds). These invest with a three to five year view of the market.

Clearly, the problems we are facing will not disappear overnight. It is important for the Government to create the right environment for investors to drive economic growth. Investment options are running out and concentration in selected counters, such as Delta, Meikles, Old Mutual, BAT and ABCH is high. These are considered to be solid.

Blue chip counters

Over the last few months investors have been moving out of middle tier stocks into blue chip stocks, a clear indication that they have lost confidence in the economy. Financials have also been on the receiving end. They dominated in the top ten losers for 2002, a complete reversal of their sterling performance in 2001.

There is, therefore, a need to restore investor confidence by implementing credible policies. Everyone has a stake in the economy, the employed and unemployed.

In November last year the Minister of Finance said that the Government, labour and industry would soon come up with a social contract.

The problems facing the economy require a concerted effort. Industry has made representations to the Government and now we await with baited breath for the way forward.

Contact First Mutual Regional Financial Advisers on:

Shepherd Shambira 091 252 639

Sofia Kara 011 219 347

Head Office: (263)(04)886000/34

Bulawayo: (263)(09) 67436

Mutare: (263) (020) 66013/66813

Fax: (263)(04)886049

These articles are published for general investment advice and it must be noted that the price of equities and the income derived from them can rise as well as fall. Neither First Mutual Asset Management nor the author shall be held liable for any losses as a result of the investment advice contained in this article. It is important that specific investment advice is sought as each investor's investment will be dependent on their circumstances.