2014: What the crystal ball says

via OPINION – 2014: What the crystal ball says | The Source January 9, 2014 By Farai Murambiwa

The dictates of being an analyst in the investments realm are that one has to gaze into their crystal ball and put their head on the block, making predictions on where their followers, if they have any, will be racking in the millions over the next 365 days.

This is no mean feat; analysts live and die by their predictions. One needs to build a history of correctly calling the market to earn the title of “Top Analyst” and such a title is often lost the moment a single prediction misses the target, even by a whisker. Consider the world renowned ‘Doctor Doom’; one Noriel Roubini, a Doctor of Economics and top analyst by any measure, whose stock rose as he correctly called the global economic meltdown way back in 2008, but earned the not so prestigious title owing to his bearish message on the back of a painfully slow global economy!

I aspire to one day reach his heights and I will begin by seizing this opportunity to make a call on 2014 for the ZSE investor, an area I believe I can speak about with some authority.

Before I do that, however, I would like to seek an exit option. In my world, we normally put this as a disclaimer, right at the end of each document, in such small print that you cannot make out the words. This guarantees we remain in business no matter how off the mark we are and I need to still have a career next year. Because my memory serves me very well, I am in a position to remind you of some bold calls made at the onset of 2013 by those operating in the religious circles.

We were told that Zimbabwe was going to be “plunged into darkness and thousands of people were destined to die due to the collapse of a “great wall” if authorities do not move with speed to avert a looming calamity! The country was also headed for a gold rush that would see people in most parts of the country “picking” the precious mineral from the ground as God begins to offer divine solutions to challenges besetting Zimbabwe. I seek not to judge the accuracy of such prophesies, but implore upon you the readers to use the same gauge in judging my prediction come the end of 2014. Help me keep my dream of one day matching Noriel.

Turning to the crystal ball, let’s first do a recap of 2013; I did not make any of my predictions public last year and that should make my life very easy. I will simply state what happened which most of you might have read already, but I will do it with style, so you need not to worry. 2013 was a very good year for the ZSE investor.

The Industrial index had its best year since dollarisation (barring 2009 which was hugely distorted) putting on 32.62 percent to end 2013 at 202.12 points, while the mining index slipped 29.68 percent to close at 45.79. A total of 2,996.89million shares worth $485.72million changed hands compared to 3,513.18mln shares valued at $ 448.18mln for 2012. Volumes thus shed 14.70 percent, while turnover conversely added 8.38 percent. Dawn Properties was the most active, pushing 505mln shares representing 17 percent of total shares traded, while Delta was dominant in terms of turnover with $139mln worth of trades that make up 29 percent of 2013’s total value traded.

In terms of movers, turnaround stories dominated, while commodity producers anchored the losers chart, consistent with the slump in commodity prices on world markets. BAT (+242.86 percent) led 2013 gainers followed by TSL (+230.43 percent), African Sun (+200 percent), Mashonaland Holdings (+150.97percent) and Afdis (+100percent).

Major decliners were Zimplow (-53.85 percent), Hwange (-47.06 percent), RioZim (-36.54 percent), RTG (-33.33 percent) and Ariston (-31.54 percent). Please note that I have separated the grain from the chaff, no company with a market cap of less than $ 10mln was included in these rankings. If you can show me how you can make proper money on those counters, I will be glad to include them next time. I hold the opinion is that no serious investors will waste time and energy focusing on companies where chances of crystallising profits are next to none.

Of note however was the increase in foreign participation on the ZSE. Foreign trades made up 60 percent of the ZSE 2013 turnover, compared to 46 percent in 2012. Foreign interest has been widely cited as one key driver to the strong performance among frontier markets, Zimbabwe included. Markets have basically been on steroids, benefitting from the huge injection courtesy of the USA’s quantitative easing and similar support facilities from central banks in the developed world. For the ZSE I am however inclined to add that the market just had to catch up with its African peers given its subdued performance over the past few years. The 33 percent growth of 2013 will prove a tall order to repeat, and 2014 does not look like a year in which it can be replicated.

Making a call for the market in 2014 is actually very difficult. The world will be going through a transition as the United States of America and fellow developed economies scale down the unprecedented cash injections in their economies. Consensus has, however, built around the notion that the scaling down is not going to be disastrous. Consumer spending has been improving in the US and it’s being driven by the purchase of durable goods.  To top it, banks look destined to make money doing what banks should do, which is lending. Interest rates are expected to gradually rise and that appetite to lend will in turn spur consumer demand. I subscribe to the thought that 2014 may in fact be a good year for US equities, but probably not as good as 2013.

Where then does this leave Zimbabwe and the rest of frontier markets which were feeding off the USA’s cash printing machines? Does this mean a total collapse as capital retreats back to the stabilising markets in the developed world? I don’t think so. I believe that insatiability in the developed world was a huge blessing to Sub-Saharan Africa and fellow frontier markets. Firstly, the world now knows that investors can reap huge profits by investing in markets like Zimbabwe, which they wouldn’t have contemplated doing a few years back. Secondly, Africa has also learnt a very important lesson that if nations position themselves correctly, they can in fact be very competitive in attracting capital. I believe this will see most capital markets in SSA continue strengthening in 2014 as more investors awake to the reality that Africa’s time to lead in terms of growth has arrived.

Turning to Zimbabwe, 2014 is unlikely to be as exciting as 2013. The official GDP growth forecast of 6.1 percent looks overly ambitious. I believe we will be lucky to achieve half that. ZSE-listed stocks, on the other hand, are in a quagmire themselves as they are likely find it difficult to grow revenues on the back of acute liquidity shortages and the accompanying collapse of consumer demand. Earnings growth is likely to be achieved where one still has room for being more efficient. Not many companies have shown ability to do that. Only Delta stands out with its innovations that continue to grow volumes and consumer spend despite fluid consumer tastes and purchasing power.

So what is the verdict? I don’t see the ZSE Industrial Index growing in double digits. I expect the market to weaken significantly with the release of December year-end financials in March and to end the first half inside the 200 point mark. A recovery may be in the offing in the second half, but is unlikely to be strong enough to eclipse 10 percent growth by year end.

Activity is likely to remain confined to the heavy caps as investors continue to exhibit fear and seek security in defensive counters. Penny stocks will be neglected even more and some will lose their listing status if the exchange does not come up with a second tier board. It is irrational to maintain a listing when your turnover is less than the annual listing fees. Huge profits will again be confined to turnaround stories. Members of the AICO group (SeedCo and Cottco), Afdis and African Sun stand out as possible candidates for the top movers at the end of 2014.