Stock equity market shrugs off economic turmoil

HARARE – The Zimbabwe Stock Exchange (ZSE) recorded a significant spike in January, notching fresh post dollarisation all-time highs, shrugging off the deteriorating economy which continues to suppress the prospects of real earnings growth.

The rally, several investment analysts told Business Times, is likely to continue because the continuous devaluation of the Zimbabwe dollar will culminate in rampant inflation.

They believe this will provide sufficient fuel for both the smaller to larger cap firms to follow suit as their top line and bottom-line start to jump further.

This means there will be buying pressure as local investors rush to buy shares, which have remained the preferred asset class and provide a safe haven in times of hyperinflation.

Market capitalisation for the local bourse spiked by a whopping 46% in January to close at ZWL$43.4bn from ZWL$29.8bn recorded December 31,2019.

The recovery by the ZSE, which has 63 listed counters, was in line with analysts’ estimates for the bourse’s rise.

A possible decisive factor behind the bullish trend in the stock market was the Zimbabwe dollar which further depreciated in January.

Government eliminated the multicurrency regime last year, in favour of the Zimbabwe dollar, which continues to plunge against major currencies.

Zimbabwe is experiencing hyperinflation, meaning several stocks on the ZSE platform do not enjoy high profitability outlook for investors in real terms despite their dramatic spike.

Recently released financial results of companies indicate no real growth in output as foreign currency shortages, local currency devaluation, power outages, fuel shortages, low disposable income and increasing costs of operations all continue to weigh down a possible recovery and growth.

The biggest driver was inflation.

Given that, the larger portion of growth in corporate earnings which sent stock figures higher in January for the small and medium-sized firms, were facilitated on a larger scale by adjustments for inflation.

All of the financials recently published are inflation-adjusted. As such, prices of stocks will most likely continue their rallies in the equities market in the short to medium term.

However, market analysts believe that one point that should not be overlooked is that the market capitalisation value in United States dollar terms in January was just about US$2.5bn, using an interbank rate of ZWL$17:US$1.

This means that the local bourse remains fragile, with total equity exposure clearly in an underweight position in US dollar terms.

The ZSE has 63 counters. Out of these, 58 are active stocks while four- Border Timbers, CFI, Cottco, Hippo and Hwange – are suspended. According to official data obtained from the ZSE, blue chip counters were behind market movement.

The biggest were retailer OK Zimbabwe, which hiked 105%, Delta Corporation, which controls the beer market in Zimbabwe and has the vast majority of the soft drinks share, is able to generate lots of free cash flow (49%).

So was Econet Wireless Zimbabwe, the country’s biggest mobile phone operator (57%).

The two companies have free cash flows and do not need huge amounts of re-investment the whole time to maintain production. The Zimbabwe Newspapers Group notched 139%.

The increase, analysts, said was accelerated partly because of the rise in inflation, estimated to have reached 520% in January.

Asset managers and other investors see stocks as a safe haven in a time of uncertainty. Turnover also hit a record high in January. It grew 309% to ZWL$36.4m from ZWL$$8.9m recorded at the end of December 2019.

“What explains the surge is that investors are trying to hedge against inflation. So, stocks remain the darling of many local investors given the not so pleasing returns on the money market,” Addmore Chakurira, an investment analyst with one of the leading securities firm in Zimbabwe, Imara Edwards Securities told Business Times this week.

Another investment analyst with a top asset management firm in Zimbabwe, who preferred anonymity, suggested the Zimbabwe stock market is undervalued and beginning to look cheap.

He added that blue chip counters moved the bourse but returns lagged behind inflation.

The bull run, the analyst said, was more of a” correction”.

“The blue chips, the likes of Old Mutual, Econet, Delta, moved up very strongly,” the analyst said.

“The mid-caps still followed. But the market was trailing or failed to recover lost ground to inflation.

Annual inflation was around 520% in January but the stock market only moved less than 40%.

So there is still buying pressure.

We might see this continuing in the coming months.

So, the bull run was more of a correction than the market charting a new path.”

The analyst said market corrections are likely to be short-lived and not last long during the year.

Tafara Mtutu, an investment analyst with Morgan & Co, said a hefty government transaction is believed to have lifted the stock market in January.

“There was quite a significant amount of money in the month of January following a government transaction onto the stock market. This drove the market,” Mtutu said.

“Also, investors were rebuilding their portfolios to fund their next holidays.”

Other investment analysts said there were governmentbacked Treasury Bills that matured in January and the injection of such funds onto the local bourse caused the spike in stocks.

Foreign investor bought a paltry ZWL$5242.50 worth of shares during the month from ZWL$20 3242.05 at the end of December 2019.

They, however, accelerated their exit from the local bourse selling shares worth ZWL$21.1m during the month of January compared to ZWL$6m at the end of December.

To a larger extent, recent controls by the Reserve Bank of Zimbabwe which imposed a 90-day moratorium on trading of fungible shares as well as the difficulties faced by foreign investors in repatriation proceeds from their liquidated investments reduced the attractiveness of the local bourse.

These are taking a bigger bite of the stocks than expected.

This justified the selling of shares by foreign investors, according to analysts.

Analysts said the foreign exodus for Zimbabwe stocks has increased, setting up January to have the highest outflows in recent years.

The economy is trapped in a downward cycle. Consequently, this drains the appeal of equities for foreign investors.

This is why they have been selling their ZSE traded shares, taking outflows to ZWL$20m in January. This is a record rate in a single month.

“It’s a negative signal that such a huge amount was pulled out of the stock market by foreign investors.

The ZSE should be attracting foreign investors instead of them continuing to pull out large sums of cash,” an investment analyst with one of the country’s largest asset management firm told Business Times this week.

Other investment analysts concurred saying in Zimbabwe dollar terms, January was a good month for stocks.

But, in US dollar terms, the stock market was not progressing.

Last month, the ZSE introduced the Global Industry Classification Standard in classifying listed counters as part of efforts to offer an efficient investment tool.

The reclassification under the new framework saw new sector indices introduced which comprises of Financials, consumer discretionary index, consumer staples, materials, industrials, information communications and technology and real estate.

Other indices including All-share index, ZSE Top 10, Top 15, Small Cap and Medium Cap, among many, were also introduced.

All shares index value closed the month of January at 332.90 points, which was an increase of 12.60%.

The benchmark Top 10 index closed the month on a higher note gaining 15.89% to close at 313.10 points, which was 15.89% increase while the Top 15, could not be outshone, climbing 14.80% to close at 308.10 points. Zimbabwe’s Small Caps dropped 0.875% to close at 831.8 points, while the medium Cap increased 5.51% to close at 355.88 points.

Out of the seven sector indices, five indices traded in the positive and gained value.

There was, however, a dramatic drop in some counters. Top losers during January were TSL Limited, Willdale, Mashonaland Holdings, RioZim, and Dairibord Zimbabwe Limited. Diversified group, TSL Limited, took a heavy blow, shedding 20% of its value to close the month at ZWL$0.8000 while Willdale Limited, a brick-making company, lost 15% to close at ZWL$0.0432.

Property investment and development firm, Mashonaland Holdings, lost 14.89% to close at ZWL$0.1149. Other counters to lose were resources concern RioZim and Dairibord Zimbabwe, a milk and dairy products producer, which lost 5.31% and 4.15% to close at ZWL$2.3200 and ZWL$0.5842 respectively. – Business Times