Are ZSE Stocks Over-valued?



Recent trading sessions on the Zimbabwe Stock Exchange (ZSE) have witnessed a fall in share prices, especially in heavily capitalised stocks. The current market capitalisation is USD17.8bn and there are several factors that have triggered the losses. Firstly, foreign investors on the market have largely been net sellers looking to exit positions largely through Old Mutual. Also, worth highlighting is that they have been looking to “test” the FX interbank system as a viable option to exit the market. Secondly, local institutional investors have largely been overweight in equities and appetite to increase exposure in shares remains limited. Further, liquidity also remains tight and institutional investors would have to sell-off some shares in order to raise RTGS dollars. Thirdly, the effective movement of the exchange rate as a result of the floatation of the RTGS dollars has meant that books must be revalued or re-aligned in line with the exchange rate, with some corporates effectively using 3.3 as the steady-state equilibrium rate. The next question therefore is whether ZSE stocks are overvalued?

It should be noted that valuations of ZSE trading stocks using market fundamentals have shown that the ZSE is overvalued. In the space of a year, the ZSE market capitalisation has grown by 110%, rising from USD 9.68bn at the end of 2017 to USD19.36bn at the end of 2018. After considering parallel rate calculations, the market was valued at over USD5.0bn which is still greater than a ‘normal’ market cap of about USD4.0bn in 2016. These large increases also add to the assertion that the ZSE is overvalued.  Other regional and global stock exchange markets do not experience such abnormal market capitalisation increases unless there are significant economic or political shifts.

The market cap-to-GDP ratio, commonly known as the Buffett indicator indicates whether the overall market is undervalued or overvalued.  Using the Buffet indicator, we compared different regional stock exchanges to the ZSE. The ZSE is much higher than the stock exchanges in Uganda, Tanzania, Malawi and Zambia which are well below the ZSE whose market cap is 107.67% (before rebasing of the GDP). Market Cap-to-GDP ratio taking into account the rebasing of the GDP results in 73.03% market cap-to-GDP ratio, which still reflects an overvalued stock exchange.  We note that any level above 70% is considered excessive.

While it is a fact that even in RTGS dollars terms, the ZSE was overvalued (using Market Cap/GDP metrics), it should be noted that investment options for local institutional investors remain limited and this should be able to sustain decent levels of demand on the local market. Currently, the money market in Zimbabwe lacks depth and investors will continue to look to equities and alternative markets to preserve value.  Assets such as property and commodities tend to provide a hedge against inflationary pressures, however pricing within asset classes such as real estate in now in hard FX.

That said, the interbank system is set to improve company productivity given that manufacturers now have a formal channel to access forex for imports. For example, Delta has been struggling to secure critical raw materials such as concentrates, and this has had a negative impact on its Soft Drinks business. Improved company performances will in the long term ensure that valuations will unwind. This phenomenon means that patient foreign money may continue to linger on the markets for value. Overall, investors on the ZSE should continue to seek value preservation opportunities. Well managed net exporters or companies with significant export potential continue to provide value preservation opportunities to investors with a long-term perspective. Some of the preferred names include Hippo, Padenga, Ariston, SeedCo and SeedCo International.