adminThe Zimbabwe Stock Exchange had a good 2013 that saw the main Industrial Index gain 32,62 percent during the year to close at a solid 202.12 points. This sterling performance was driven mainly by foreign investors who during the year bought shares worth US$291 million, whilst also selling shares worth US$194,7 million in a market that had a cumulative turnover of US$485,7 million for the year.
We strongly believe that one of the key reasons behind increased foreign investor participation on the ZSE during 2013 was because of Quantitative Easing (QE) programmes in many of the advanced economies especially the United States.
Leading economists have, however, argued that a large chunk of the cash injected into these advanced economies through QE has found its way onto global equity markets particularly in emerging and developing economies, where the funds arrive mainly in the form of portfolio investments as witnessed on the ZSE.
Furthermore, the Fed must also be worried that a large part of the cash they are pumping into the economy has fuelled a stock market rally in the US that has left their main indices the Dow Jones Industrial and the S& P 500, closing the year at all-time highs of 16,576.66 points (annual gain of 26,5 percent) and 1,848.36 points (annual gain of 29,6 percent) respectively.
However, with the US economic recovery now strengthening, the Federal Reserve as at its December 17-18, 2013 meeting surprised many investors by deciding to cut bond purchases by US$10 billion, reducing their monthly bond purchases to US$75 billion, which is still very high but an indication of its intent to taper QE in the near future.
What this means from a ZSE perspective, is a gradual decline in foreign portfolio inflows as well as a potential increase in foreign outflows as deteriorating economic fundamentals negatively impact corporate earnings and ultimately shareholder returns.
Local fund managers have since the bear market of 2011-12 generally adopted a somewhat defensive equity strategy because of mainly the relatively high money market yields that still prevail on the market, as well as to avoid the volatility of the equities market which has worsened because of the lack of market liquidity.
Furthermore, because of the increase in the number of companies that will either be laying-off workers or closing shop, local fund managers will most likely be net sellers in 2014 so as to meet increased pension fund redundancy expense payments.
Therefore for 2014, we should see from a fundamental perspective an overall decline in demand for equities on the ZSE from both foreign and local investors.
Companies that will excel on the ZSE in 2014, in our opinion will have three main attributes namely, low debt levels, a strong cash generating capacity, and most importantly a skilled management team ring-fenced by good corporate governance structures.
This is because, in a deflationary environment companies with high levels of debt are usually the first to get into financial distress as weakening demand forces firms to reduce margins to maintain their revenue bases, thereby reducing their ability to service their finance costs.
Furthermore, in as much as inflation aids the borrower through lower real value repayments in the future, deflation has the opposite effect as it raises the real value of repayments in the future, further increasing the debt burdens of firms that are highly geared.
In a market that is hamstrung by liquidity, a strong cash generating capacity is a major competitive advantage as it reduces a company’s reliance on external funding for working capital financing.
In addition, providers of capital are more inclined to offer companies that generate strong cash flows better credit terms because of their ability to make timely repayments.
The most important asset a company could have is its management, because it is their vision, strategy and commitment that ensures the company grows and remains a going concern.
Juxtaposed to good management is the need for strong corporate governance structures that are also mandatory for any successful company.
Poor corporate governance is probably the leading cause of corporate failures in this country, therefore is one factor no investor should ignore going into 2014.
From a sectorial perspective, we expect the consumer sector which encompasses listed companies in the food, retail, hotelier, telecoms and beverages business, to remain the dominant sector on the ZSE with regards to revenue and earnings.
However, the melancholy of 2013’s festive season was a clear indication that at household level, all was not well financially, and that listed companies especially in the consumer sector that rely heavily on Christmas sales to bolster their year-end profits, might see their revenues and earnings decline.
The average PE ratio for all consumer stocks on the ZSE was at 14(x) against a ZSE Industrial Index average PE of 10.86(x), implying that firms in this sector because of their historical performance are expected to perform better than the overall market.
We also expect financial counters on the ZSE to have a good 2014 on the back of the recapitalisation of the RBZ and the injection of the US$100 million Afreximbank Interbank facility, which will hopefully stabilise the sector.
The banking sector, with the exception of Barclays Zimbabwe trades at very low PE ratios, which in our opinion will improve when stability is restored.
The insurance sector will in our opinion, continue to struggle in their core business of selling polices because of depressed household disposable incomes, and therefore would have to rely mostly on their investment income to grow their earnings.
Companies under the manufacturing sector will most likely remain the dogs of the market as none of the key challenges that the sector’s representative body (CZI) remonstrated to Government were addressed in the 2014 National Budget.
This article was written by Zimnat Asset Management for FinX
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