ZSE bucks the trend

…Rallies despite economic turmoil


The Zimbabwe Stock Exchange (ZSE) has been on an unrelenting market
rally despite an economic turmoil created by the deadly coronavirus pandemic and poor economic policies.

The rally comes despite the virus that is wreaking havoc across global stock markets with drivers of sectors such as the currency, employment, wage growth and access to credit, having moved from being tailwinds to headwinds amid fears this could have been enough to shake the nerve of even the staunchest bulls currently driving the ZSE.

The local bourse has been overly hot and bullish with share prices going up
fast, a situation which has resulted in the stock exchange returning almost 240% or ZWL$71bn in the past four months to reach an all high ZWL$102bn market capitalisation from ZWL$30bn in January this year, overcoming troubling aspects surrounding the underlying economic environment and Covid-19 -induced volatilities, which so far have no end in sight.

In real terms, however, the local stock exchange’s market capitalisation, which is the total value of listed companies, this week was valued at US$4bn using the interbank market exchange rate of ZWL$25: US$1 or US$1.8bn using the parallel market rate of ZWL$55:US$1 from US$1.17bn in January this year.

The lofty stock valuations saw the All shares index trading climbing to 788.25 points, gaining more than 242% year to date.

Penny stocks also known as small cap indices performed well, gaining
395.55% to close at 3 135.96 points. Medium caps also climbed into bull market and stood at 1 123.42 points.

Rich pickings were in the Top 10 counters or blue chip companies, which have the financial wherewithal to go round the current economic turbulence. If one looks at the overall market weight, large caps contribute over 75% of the overall ZSE basket. The Top 10 counters closed at 639 points, representing a year to date of 215.38%.

The upside saw Cassava Smartech becoming the biggest company on
the ZSE by market capitalisation with ZWL$14.03bn followed by
Delta Corporation at ZWL$12.8bn.

Econet Wireless Zimbabwe was sitting at ZWL$12.1bn, while OK
Zimbabwe sitting ZWL$4.8bn.

There was also some significant wealth created in smaller counters
with the favourite being the cable manufacturer, CAFCA , which
gained more than 1000% to hit 2000 cents followed by Art Corporation
which gained more than 900% to close at 1341 cents. First Mutual
Properties and Medtech also had a good run on the market.
Turning to sector indices, the financials index shot to 1 354.95
points, while the consumer discretionary stood at 1 380.91 points.

Consumer Staples were at 745.98 points, while Industrials index was
at 914.35 points. ICT, materials and real estate stood at 1 509.64 points,
1082.11 points and 1 800.18 points respectively.

Investment analyst Ranga Makwata told Business Times that
many investors were favouring blue chip counters because of their great
business models.

Makwata said the ZSE was defying the lockdown as it has been ‘de-linked’ from global market because of perennial domestic macroeconomic problems’.

He also pointed out that the hope of ZWL$18bn rescue package announced by President Emmerson Mnangagwa to be injected into the economy was driving the upswing.

Makwata said while good news drives global markets, bad news and
fear such as currency deterioration, runaway exchange rate and
hyperinflation were driving up the local stock exchange.

“Investors are buying mostly counters in the top 10 by market
capitalisation because they have great business models which put
them at good stead to bounce back quickly should the economy start to
recover,” Makwata said.

“Many were lagging the currency and are now playing catch up. For
as long as the market keep seeing increased liquidity the stock market
will be firming in Zimbabwe dollar terms whilst in real terms it could
actually be going backwards. [This is] pessimism rather than optimism
is behind the recent rally.”

He, however, indicated that in real terms the ZSE was going backwards
as it has gained 36% in real terms to US$1.757bn year to date thanks to
mainly last week’s rally.

Makwata said the market performed badly last year losing 72% in real terms and even with this year’s rally the market is still 62% off
December 2018 levels.

“Printing, currency depreciation and inflation will be ‘good’ for the
(stock) market. Investors simply need to monitor these elements
with any negative outlook a catalyst to equities rally in 2020,” Makwata

So, does it mean that Zimbabwe investors are looking at the sunnier
side of the possibilities?

Makwata questioned the strength of the Zimbabwe stork market rally
adding that bad news was driving the local bourse.

“As a result many are wondering why the ZSE is defying the global
trend where stocks are down on Covid-19 worries. In other market,
good news move markets but in Zimbabwe fear causes prices to surge
as ZSE is deemed a ‘safe haven’ for hedging inflation risk,” Makwata

“[The] fear, especially that of currency depreciation and resultant
hyperinflation is [driving prices up].

It’s not like investors were exuberant as they bought shares but may have
responded to announcement of ZWL$18bn rescue package – feared
to come from printing and new ZWL$10 and ZWL$20 bank notes
which are expected to feed the cash rate.”

Zimbabwe’s annual inflation was 676% in March so investors could
be looking to preserve value by buying stocks. There is also shortage
of cash and runaway exchange rate.

This leaves ZSE as the only viable market for investors.

“But, remaining foreign investors took advantage of the rally to sell
ZWL$42m worth of shares for repatriation using either parallel
market or hoping Old Mutual fungibility will be restored.”

BancABC Asset Management Zimbabwe managing director,
Jubelah Magutakuona said there is “too much cash looking for scrip
because of expected high inflation and the recent currency weakness on
the parallel market”.

“At the parallel rate the ZSE is only about US$1.5bn. The market
is rising in nominal terms but there is nothing happening in real terms.
Volumes sold and inflation adjusted earnings are expected to be weak in
the second quarter of the year going forward because of Covid-19,”

He said it was too early for investors to celebrate because the current market gains were vulnerable.

While business in Zimbabwe is in a dark place due to deteriorating
economic conditions and hard to ascertain where the already frail
economy is going next due to the negative impact of Covid-19,
Zimbabwe stocks appear to be immune to the current situation
at play because yield continue to be good, meaning investors are
pocketing sizable gains.

There was very minimum hemorrhage on the ZSE. This makes
the stocks very expensive.

To many, it’s particularly perplexing, how an economy that has fallen off a cliff like the Zimbabwe one, have a relatively rosy stock market when there is bloodbath on all other global stock markets.

Surely, the ZSE is completely divorced from what’s happening on
the ground, several local investments analysts told Business Times.

They indicated that local stocks were the most overpriced thanks
to uncertainty surrounding hyperinflation and runaway
exchange rate and they believe stocks were selling at prices they
wouldn’t sell if it was linked to world fundamentals.

This means the local stock market is largely underestimating how the
COVID-19 pandemic can prompt a permanent damage and change to
both the economy and companies listed on the ZSE.

It’s still misery how the coronavirus and an economy which is on course to a sharp contraction this year as efforts to contain the pandemic has hit industry activities in Zimbabwe, has not rocked the ZSE, but has shattered global stock markets.

Here is how major stock markets across the globe reacted to Covid-19 pandemic.

At the London Stock Exchange, it has wiped £125bn off value of major
United Kingdom firms since March. This was the biggest stock rout on
record since the Black Monday of October 1987.

There was also bloodbath at the New York Stock Exchange with

listed companies losing billions of dollars of their value.

The Arab stock markets also plunged into bear-market as panic set in. And major markets in that region combined lost almost a quarter in value due to
the coronavirus pandemic and the collapse in oil prices.

The twin crises – Covid-19 and oil prices troubles- have “shattered
the stock market in Arab countries, putting the performance of
financial markets below the 2008-2009 collapse”, according to the
Economic and Social Commission for Western Asia.

Closer home, South Africa’s Johannesburg Stock Exchange, which is the biggest bourse in Africa, with market capitalisation of US$987bn, suffered its fair share of the carnage as almost ZAR1 trillion has been wiped off the JSE since March.

The Nigerian Stock Exchange (NSE), the second largest and one of
the most developed stock exchanges in Africa which has a market
capitalisation of about US$44bn dropped about US$10bn.

The downswing on listed companies’ values was also felt at the Casablanca Stock Exchange in Morocco.

The bourse—the third largest stock exchange after JSE and NSE—
recorded the biggest decline in its history losing about US$61.9m
since March.

There was also panic at the Nairobi Securities Exchange, in Kenya, where the Covid-19 cut shareholders wealth by KES458bn.

The last time the bourse was in such lows was on March 23, 2003.
Global markets were, this week, starting to come back to life.

Central banks have delivered trillions of dollars in stimulus
measures to help ease the economy and financial markets to stop
markets from freezing up.

Many investors believe that monetary and fiscal stimulus could
be sufficient cocktail to help global stock markets ward off a revisit to
the depth of previous lows.

The rebound this week can also be attributed to a ‘fear of missing out’
attitude among investors.

However, leading global investment banking, securities and investment management firm, Goldman Sachs, this week, predicted stocks at major bourses across the world will tumble by nearly 20% in the next three months due to troubles in their economies.

Given such a development, perhaps, the most prevalent question
to ask is why Zimbabwe engulfed by the double punch-the coronavirus
and economic pain-has resisted slipping into bear markets?

The local bourse delivered relatively strong returns, instead,
failing to reflect the local economic realities.

This is despite that the great majority of listed companies in the past three months have been publishing financial results which were subdued.

They were also disclosing the ongoing impact of government’s
forced Covid-19 lock down.

Some listed companies are yet to publish their financial results after
they were granted the ability to extend their reporting by an additional 30
days to end of this month to help them cope with Covid-19 impacts.

But they have published updates in which almost all feared the
catastrophic economic damage from the indefinite lockdown imposed by
President Emmerson Mnangagwa last Saturday.

Local consumers are also not in good position to boost the economy
as they are highly indebted and the rate of credit, particularly unsecured
ones, being granted to them is slowing.

Consumer income and spending are under pressure relative to
previous years.

While the introduction of multicurrency in 2009 helped Zimbabwe emerge from hyperinflation, the fragile economy is now in urgent need of another
source of growth which should come from improved infrastructure
spending and exports.

But, these potential sources of growth are not evident at this stage
of the business cycle.

Some investors were more hopeful about Zimbabwe’s economic

Others said they don’t have a lot of places to go with their
money because the money market or government commercial paper, the
Treasury Bills, are offering super low returns if at all.

The property market has been hit by inflation and struggling with
voids and rental arrears.

An analyst also speculated that with casinos and sports betting
closed down due to Covid-19, some people were playing the stock
market instead.

Gains at the ZSE have largely been driven by local investors as
foreigners have been pulling out due to government policies especially
after the suspension of the fungibility on three counters—Old Mutual,
Seed Co International Limited and Pretoria Portland Cement.

Currently, foreign ownership of shares is at an all-time low. Analysts
say some investors could be flying blindly given the overall negative
undertone from current economic challenges the country is facing.

They believe the local stock market will face turbulence again.
There are several risks, analysts say, that investors on the local
bourse were ignoring or overlooking such as companies are enduring
an economic downturn and the majority of them have suspended
their dividend payments so far, an observation from the companies’
latest financial results.

There is also going to be a lengthy reboot of the economy, meaning they expect an economic upswing to come in fits and starts.
Also, the Covid-19 infection rate is increasingly suggesting the quick
rebound won’t come easy.

Consequently, the expectation of a full recovery of the economy could
be a “crazy talk”, they said.

Several economists have predicted a sharp contraction this year of between 15% and 20% because the economic cost caused by coronavirus continues to mount.

ZSE listed companies have struck a more sombre tone saying there
will be a lot cascading effects of recession aftershocks of Covid-19,
meaning businesses will struggle to stage a rebound from their damaged

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