adminTHE disconnect between the performance of the stock market and the economy in 2013 was so apparent that it was clear that a correction was imminent at some point. It simply did not make sense for the stock market to sustain such a rally on the back of weakening economic fundamentals because in the end, lagging indicators such as lower corporate earnings would definitely force the downward revision of growth projections and valuations across the market in light of the new economic realities, as is currently the case.
Two months into 2014, the Zimbabwe Stock Exchange Industrial Index had as at the February 26, already shed 6,5 percent from its December 31, 2013 closing value of 202,12 points.
Financial results and trading updates of listed companies published after December 2013 have also clearly revealed that business activity in key sectors of the economy has been and continues to be subdued in the short-to-medium term.
Coincidentally, foreign investor activity on the ZSE has since the beginning of 2014 significantly declined because of what is now termed the single biggest selloff in emerging market currencies since 2009.
The two main reasons behind the emerging market currency selloff are the tapering of Quantitative Easing (QE) in the US and the slowing down of economic activity in China.
The US Federal Reserve (Fed) after announcing in December 2013 that it planned to taper QE through a $10 billion reduction in monthly bond buying, on January 29, 2014 shocked the market by further announcing that it would reduce its bond buying by an additional $10 billion to $65 billion a month.
The sudden change in policy by the US monetary authorities has increased panic amongst investors as there is fear that liquidity is drying up especially in the emerging economies which had become accustomed to using the cheap QE funds to fan their growth.
Therefore global investors strongly believe that the tapering of QE indirectly means that growth in emerging markets will most likely become both more expensive and slower.
Secondly, the belief that China the world’s largest emerging economy and chief buyer of exports from other emerging markets was slowing down also amplified the emerging market selloff. A recent report by HSBC Holdings Plc and Markit indicated that China’s flash manufacturing purchasing managers index (PMI) estimate for February 2014 may hit a seven month low at 48,3 confirming a deterioration of operating conditions in the countries manufacturing sector.
What this all means for the ZSE is that foreign investor participation will be more constrained in 2014 compared to prior years.
Looking at the activity on the ZSE in retrospect, during the year 2013, the total value of trades that went through the ZSE were $480,3 million of which foreign buys and sells accounted for $289,2 million and $201,8 million respectively.
The top five stocks by market capitalisation accounted for 74 percent (trades worth $355,3 million) of the total value of trades during 2013, implying that the remaining 53 listed companies shared the remaining 26 percent (valued at $125 million) worth of total market trades.
Within the top five stocks by market capitalisation, Delta Beverages dominated the group with trades worth $138,4 million going through the market during the year, while Econet was closely behind with shares worth $126,1 million being traded during 2013.
Innscor the third largest stock by market capitalisation had trades worth $44,6 million during 2013, which is around a third of the value that was achieved by Delta during the same year.
Foreign investors during 2013 bought Delta, Econet, and Innscor shares worth $104,9 million, $86,8 million and $23,6 million respectively, accounting for a cumulative 74,4 percent (valued at $215,3 million) of total foreign investor purchases on the ZSE. Foreign investors also during 2013 correspondingly sold Delta, Econet, and Innscor shares worth $77,3 million, $69,2 million, and $17,1 million respectively, accounting for a cumulative 81,1 percent (valued at $163,6 million) of total foreign investor sales on the ZSE.
What all these statistics tell us is that the ZSE in reality is biased towards the top five counters by market cap which account for 62 percent of the weight of the ZSE Industrial Index.
Therefore the ZSE Industrial Index is not a true reflection of the broader market which can actually be a mixed bag of negative and positive performances that are not reflected in the index because of the size of the companies relative to the top 5 counters.
Against this background, despite the overall negative outlook with regards to the equities market from a fundamental perspective, there are always opportunities on the market especially in recovery stocks.
This article was written by Zimnat Asset Management for FinX.
Online Reporter