Markets

Investors jostle to protect funds from value erosion

  • Zim stocks tumble amid currency reforms
  • Turnover value lowest in 10 years

PHILLIMON MHLANGA

The Zimbabwe Stock Exchange (ZSE) plunged during the 12 months to December 2019 in United States dollar terms weighed down by policy inconsistencies and a weakening domestic currency.

Government re-introduced the interbank foreign exchange market in February last year decoupled the United States dollar from the local currency.

The opening exchange rate was pegged at ZWL$2.5:US$1 but has weakened to about ZWL$16:US$1.

Consequently, the ZSE registered some gains, estimated to be close to 60% on the back of the devaluation of the Zimbabwe dollar.

The devaluation raised new concerns about the economy.

The Reserve Bank of Zimbabwe also imposed a 90-day moratorium on trading of fungible stocks, which seemed to make matters worse and heightened fears about foreigners’ failure to repatriate proceeds from their liquidated investments.

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

Although, stocks have been soaring in Zimbabwe dollar term, with market capitalization ending the year at ZWL$29.9bn from ZWL$19.8bn, the picture has been less positive with the overall market value in US dollar term.

Naturally, in times of hyperinflation, and subsequent value erosion, stocks provide a safe haven.

More than 50 counters closed with positive gains for the year a post dollarization record high. An analysis of the top performers, including Padenga, Dawn, Willdale, Proplastics, CBZ, Old Mutual, Meikles, RTG, Ariston, MedTech and ZHL, showed that 60% of the counters were exposed to foreign currency earnings.

Last year yields were more than 50% per annum but the biggest driver was inflation and exchange rate losses in the aftermath of the Zimbabwe dollar liberalization.

However, investors were left jostling to protect their funds from value erosion.

In US dollar term, the market capitalisation declined by about US$6bn or about 77% to US$1.98bn end of December 2019, using an interbank rate of ZWL$2.5:US$1. Share prices declined in US dollar term for the top 10 counters which contributed more than 70% of the total market cap of ZSE.

It’s evident that the US dollar prices of most blue chip counters were now trading below their five-year lows that were predominately witnessed in 2016.

It’s a reflection of a contracting economy, analyst told Business Times this week.

Many believe that the slump is due to economic difficulties and the re-introduction of the Zimbabwe dollar which has eroded confidence in the market.

This has resulted in stocks lagging behind inflation and exchange rates.

Turnover value was ZWL$191.1m in December from ZWL$295.8m in January.

Foreign buying was relatively low at ZWL$25.3m in December 2019.

“In real terms it’s the lowest in 10 years,” Equity Axis said.

The research firm added: “In terms to contribution to total turnover foreign flows account for 13% which was the lowest in 11 years.”

Changes in currency and a shift in policies rattled investors mainly foreigners who chose to sit on the sidelines and observe how the market plays out.

“We are of the view that the market is grossly undervalued, we believe from a general net asset valuation most companies show sharp upside while from a ratio perspective the upside is even higher.”

Foreign deals value also plummeted. In December 2018, the value was US$40bn, but came down to about ZWL$25bn, which was about US$1.5bn in December 2019.

Although stocks suffered such losses during the year, the stock market remained the preferred asset class for investment because the money market which was largely guided by RBZ interest rate decisions, suffered sharp losses in the first half of the year.

The property market struggled to stabilise in the face of an economic downturn.

Changes in currency and slowing demand negatively affected property yields.

“The 90-day moratorium obviously affected appetite for investment because there is a constraint,” Itai Chirume, the executive director of MMC Capital told Business Times.

“If an investor wants to bring in investment he or she needs 90 days. To take the proceeds out, that investor needs another 90 days. This means, before you do anything, you have six months of waiting on trading on fungible shares or dual listed shares.”

The difficulties faced by foreign investors in repatriating proceeds from their liquidated investments have reduced the attractiveness of the market.

Given the above scenarios, our view is that there is greater likelihood of short-term volatility in the market given the momentum swings that we have witnessed in 2019.

“Consequently, listed equities investments are at best, a long term play (4-6 year investment horizon) and investors must be prepared to ride the short-term volatility cycles.”

The stock market is significantly weakening in value for stockholders, whose funds are locked on the lacklustre bourse.

What makes it a little more difficult is that the local bourse remains fragile, with total equity exposure, which has remained the preferred asset class, clearly in underweight position.

Research firm Econometer Global Capital said foreign investors are continuing to sell off Zimbabwean stocks amid erosion of currency values and struggling entities.

“Dollarisation had made Zimbabwe a safe haven for both local and foreign investors.

But the policy shift, particularly the return of the Zimbabwe dollar and bottlenecks faced by investors in repatriating dividends back home dealt a huge blow on gains the ZSE had achieved.

In just seven months since that policy change in February 2019, the ZSE industrial index registered 57% to 774.55 points, with most counters rising on the back of monetary changes.

 “Hedging against economic upheavals seemed prudent then but as it stands, the exchange has become a club of a handful stocks that only determine the movement of the bourse but also the pace.”

On the outlook, analysts see stocks scaling even higher in 2020 in Zimbabwe dollar terms driven by slowdown in volumes loss as was the case in 2019. It’s also based on expected exchange rate weakness.

The change in currency and the subsequent depreciation of the local currency means more liquidity has to be induced to maintain or at least cushion aggregate demand.

As the economy continues to falter, several analysts sees risk of full blown recession rising.

They also see stock volatility growing and fears of full blown recession are mounting.

The local bourse, sadly, is expensive, even at depressed levels compared to the MSCI Emerging Markets index, according to Chirume.

“ZSE’s price to earnings ratio is 24.23x relative to 13.94x. While US dollar prices seemingly reflect that stocks are at their cheapest and an upside potential economic challenges continue to suppress the prospects of real earnings growth,” he said.

Recently released financial results 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 continues to weigh down a possible recovery and thus growth.

The local currency shows a devaluation of more than 500% so far.

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