Stocks are a safe haven for Zimbabwean investors this year with mining and property counters being top picks, analysts have said, amid rising inflation and a weakening currency.
In the absence of major structural reforms that bring stability and improve the foreign currency situation, driving inflation, Zimbabwe’s economic turmoil is expected to continue.
Analysts say the money market has become less lucrative as rates struggle to match inflation while space in the property market is limited as players are keeping their positions – hedging against a huge currency risk.
However, foreign investors are ditching the Zimbabwe Stock Exchange (ZSE) as the bourse is weakening in US dollar terms, with investments in Zimbabwe becoming less attractive as repatriation of profits and dividends remains a challenge.
Batanai Matsika, head of Research at Morgan and Co, said there are already negative reports on the outlook of the Zimbabwean economy in 2020, effectively affecting the performance of the ZSE.
A recent note from the Economic Intelligence Unit put forecast of Zimbabwe’s GDP at -12,9 percent for 2020, making it one of the worst performing countries in the world after Venezuela.
Matsika said the outlook is gloomy.
“There are a lot of headwinds such as the issue of drought that will definitely affect inputs for companies and present a threat in terms of food security. There is also an issue of power generation and power cuts and this directly impacts on production and capacity utilization in terms of outlook for the ZSE in 2020,” Matsika said.
“The key narrative is that the market has continued to be depressed on a pricing perspective, which is the market capitalisation. It shows you companies are looking depressed. We expect foreign investor activity to remain low given currency reform and the movement of money win and out of Zimbabwe which hinders portfolio investors.”
Foreign investors, Matsika said, are excluded from participation on the local bourse and as a result are leaving the market. Portfolio investors, he said, will not come into Zimbabwe in the absence of policy changes particularly in respect of currency.
“On the local front we have the pension funds asset managements which are contained in terms of liquidity so we don’t expect the market to yield significant gains under the current environment,” he said.
Despite the challenges, pockets of opportunities remain in mining, hospitality and the property market. Matsika said property counters are undervalued while the mining players like RioZim, Falgold and Padenga will benefit from a bullish global gold outlook.
However, power supply and availability of foreign currency hinder operations. Opportunities remain in tourism as a result of a generally peaceful environment.
Going forward, Matsika said, top picks will be exporting companies.
“Your Ariston, Simbisa, Padenga and those that have regional exposure because what you want is to de-risk Zimbabwe. You are looking at your SeedCo too,” he said.
Economist Rutendo Masawi said while the market is not predictable, 2020 is likely to worsen and this could force investors to keep seeking cover in stocks.
“It’s natural that inflation drive up stock market as investors pushes to protect their funds from erosion,” she said.
Last year, stocks provided a safe haven against economic turbulence alongside gold, bonds and certificates of deposit. Masawi said 60 percent of the top performing counters were exposed to forex earnings and the biggest driver of the stock market gains in 2019 was inflation and exchange rate losses following the return of the Zimbabwean dollar as the sole legal tender.
“Of the 59 counters trading on the ZSE, 57 closed with positive gains which were a post dollarisation high record. Cassava Smartech and Fin tech tumbled…In 2019, stocks went to 57 percent from 46 percent in 2018 according to ZSE,” she said.
In 2019, observers noted foreign investors continued to sell off Zimbabwean stocks amid erosion of currency values as well as struggling entities. The ZSE, research firm Econometer Global Capital, was one of the institutions in the region to be hit by a foreign currency drought following the shock abandonment of the multi-currency system in June 2019.
“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 foreign investors in repatriating dividends back home dealt a huge blow on the gains the ZSE had achieved,” Econometer said.
In the first seven months after since that policy change in February 2019, the ZSE Industrial Index registered 57 percent gains to 774.55 points, with most counters rising on the back of the monetary changes, but in USD terms, the picture was less positive with the overall market value of the ZSE down 75 percent to US$1.98bn.
The ZSE was Africa’s top performing stock market in United States dollar terms for the first six months of 2017.
“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.
“Looking closely at a five-year period, comparing the current USD prices of the stocks we can conclude that most of the blue chip counters like Delta, Innscor and Econet are now trading below their 5-year lows that were predominantly witnessed in 2016,” Econometer said.