via Something must give for ZSE in 2015 | The Herald January 22, 2015
A false start to the year proved to be a precursor for what would turn out to be worst year in 20 years of equity trading in Zimbabwe on an adjusted basis. The mainstream index fell – 13 percent in the first quarter gradually shedding – 19.8 percent as at year end.
As a background the major yardstick of performance on the ZSE, the industrial index, which is a measure of the aggregate weighted price movements of all listed counters incurred its worst decline in 25 years in 1992. The year is a very popular year in Zimbabwe’s economic calendar because of the controversial ESAP which together with the drought exacerbated the economy as GDP contracted by 7.5 percent while consumer demand shrunk by 30 percent. In this historic year the mainstream index lost over half of its value as 53 percent in equities value was forgone.
Fast-forward to 2014, Zimbabwe was just emerging from an election year with high hopes as the prior year was packed with economic niceties while some sections especially foreign hoped for a new government. Data from the election year shows an aggressive accumulation in the mainstream index of 53 percent from January to July 31st which is the exact date elections were held. It suffices to say the aggression in prices was speculative and lacked any fundamental merit. The economy went on to lose an estimated -10% in GDP terms in 2014 which by comparison is -33 percent worse off the 1992 out-turn.
While most stock valuations remained cheaper in that period compared to regional peers, the reality of a slowing down economy was there for all to see. Post elections period saw a wide selloff on the ZSE with the month of August alone realizing a negative return of -22 percent. Major stocks like Delta and Innscor which had much foreign exposure dented the most as panic hit hard on the external investors. Despite a sharp plunge in the third quarter, the market emerged 33 percent firmer as at year end 2013. The gain was out of range with the post dollarisation averages.
It is this legacy of anomaly carried forward from 2013 that came back to haunt the stock market in 2014. While GDP growth has been proved not to be correlated with the general stock market performance as measured by the industrial index in Zimbabwe’s case it is equally true that corporates’ financial and operational performance hinges on the general economic direction. Thus the economic landscape is at the core of fundamental analysis. Therefore the general market direction often times than not takes a cue from the economic out-turn.
To be more microscopic, one could not escape the dismal sector wide financial performance which took a turn for the worst beginning 2013. Market leaders began to lose sales posting contracting bottom lines. Delta highlighted a sharp decline in lager volumes which could not be sufficiently matched by a spontaneous increase in sorghum beer volumes due to the margins mis-match. As the economy tightened customer tended to trade down the value chain and this mirrored the whole economy. Econet reported a plunge in voice revenue which could not be matched with growing data and overlay services revenue. While the case of Econet had external factors such as disruptive technology, the impact of strained consumption could not be wished away. Innscor likewise had its stories too.
Summing the market leaders’ financial performance at this point could have given a clearer and more reliable indication of the year ahead as the market closed the year overvalued. While the long run ZSE average PE is estimated at around 10x, the 5 year average currently stands at 3.42 percent way below the obtaining level as at year end 2014. The average price to earnings ratio for 2014 stood at 7.5x which produced a variance of over 100% to the five year average. However compared to the rest of the sub Saharan markets the ZSE is the cheapest using multiples as a measure of relative expense on massive discount.
African markets generally fared lower with an aggregated negative return of -14.51 percent from seven African stock markets tracked by Morgan Stanley. Zimbabwe’s decline was the worst among such closely tailed by Nigeria and Ghana which also suffered record declines.
While Nigeria’s weak performance was generally viewed as a market correction, Ghana’s decline followed an over 30 percent decline in its currency which was record as the worst globally. Kenya, Uganda and Malawi were among the best performers.
Going into 2015 it is imperative to trade with increased caution even in the few selected heavy caps. Unfortunately most valuations have to be revised further downwards discounting in appropriate measure the effects of shrinking demand and the economic over bearance.
Market leaders Delta and Econet might find the going getting tougher as beer prices and voice tariffs were reduced by measures of 10 percent (cumulative) and 30 percent respectively. Only innovation can save the day for the market leaders; new products have to be introduced to substitute for lost revenue in other now less popular products to maintain even current valuations. Innscor may on the other hand reap the rewards of a massive restructuring exercise they undertook in 2014 after a very depressed financial outturn which saw them lose almost 50 percent of their market value.
From a technical aspect the first quarter might close in the negative of – 3 percent or less based on a 6 year trend analysis. This is a period between post dollarisation between 2009 and 2014. A look at the quarter on quarter data shows that the last quarter of each year’s return momentum was carried over to the first quarter of the succeeding year. Using a probability measure on the data for such an outcome will give us a result very close to 1.
Faltering economic fundamentals will always to a large extent dampen the prospects of an immediate market rebound while the over-reliance on cherry picked heavies as a safe haven for investors will also prove to be a short run threat as it overprices the market.
Currently the 3 top capitalized stocks account for over 70 percent of aggregate turnover on the ZSE. It should be noted though that over the past week, the market has been creeping up and if it’s true that the stock market is a precursor of any turn in the economic tide then we will have some slight optimism. – Wires
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