By Admire Mavolwane
THE Zimbabwe Stock Exchange (ZSE) was, according to a report carried by the Herald on Tuesday, the best performing stock market on the contine
nt in 2005. With a return of 1 545%, the ZSE was ahead of the pack, followed by the Casablanca Stock Exchange (Morocco) which managed a return of 146%.
In third place was the Uganda Stock Exchange with an annual gain of 80%. The Johannesburg Stock Exchange, reported to be the biggest in Africa both in terms of number of counters and US-dollar market capitalisation, just managed a “meagre” 42,2% return in 2005.
Should the Zimbabwean investing public be patting one another on the back? Are congratulations in order?
In a way yes, especially for those participants who were in it from the beginning. It will be pertinent to recall that the year-on-year inflation rate started 2005 at 133,6% and closed the year on 585%. This closing position also happens to be the peak for that year. Looking back, 2005 now seems to be the good old days in as far as inflation is concerned. The average year-on-year inflation rate works out to 267% which, when compared with the year to date gain on the ZSE, gives a margin of 1 279 percentage points.
By comparison, across the Limpopo the average inflation rate was 6%, which gives a return over and above inflation of 36 percentage points. It is pertinent to highlight that, down south, real interest rates are positive giving investors a viable option. Policies are well researched, consistent and the stock market is not subjected to the shocks and surprises which are the order of the day in Zimbabwe. As such the performance on the JSE is in a large way correlated to the fundamentals of the economy and investors do have a reason to be partying also.
At a guess 2006 looks set to be another good year for Zimbabwean investors, in spite of the fact that the governor did take away the punch bowl on October 9. So far, the industrial index has notched up 2 145,6% since year began and mid way into November, although appearing to be somewhat wobbly, has gained 20,5%. Barring unforeseen policy changes, which cannot be discounted at this point in time, the market should cap another fine month and possibly the year.
While the authorities seem to frown upon any buoyancy on the stock market there seems to be an uncanny correlation between the performance of the stock market, consumer goods, volumes and interest rates.
Delta recently alluded to the fact that April was a very bad month for them, a fact that was collaborated by management at OK, Meikles, Innscor and Pelhams. The huge drop in volumes, whilst it has been attributed to school fees payments, eerily comes on the heels of a poor ZSE performance in February and March which saw the industrial index declining by 14,1% and 20,1%, respectively.
Our view is that school fees alone cannot explain the drop in volumes especially given the fact that a similar occurrence did not happen in August and neither did it in January 2006. The reason for the fall in shares was the shift to a tight monetary policy anchored to tightened statutory reserves and high interest rates. It is apparent that the high interest rates provided an alternative investment vehicle to the stock market but does it mean that consumers were also investing rather than spending?
Management at Afdis told shareholders at its annual general meeting held recently that volumes have begun to recover and were up 15% year-on-year in the quarter to September 2006. Yesterday morning Innscor and Delta reaffirmed that volumes have started to trend upwards and are at this point in time holding. This is despite that most of these corporates have been aggressively pushing up their prices. The resurgence in volumes suspiciously started occurring in the later half of August, a time when bulls were firmly in the ascendance, and interest rates were at a record low. In actual fact real interest rates were negative. School fees do not seem to have had an impact this time around.
Although the argument looks thin at the moment, it would in future be worth watching the correlation between consumer goods volumes and the performance of the stock market.
A week after the release of interim financials by its spin offs, Pelhams and OK, Delta yesterday produced a solid set of results which confounded even the most optimistic amongst the market analysts.
Volume growth, which is the main driver of turnover, continued to be the main challenge with the key beverages business experiencing a 17% drop in volumes when compared with the same half last year. In some product lines such as carbonated soft drinks the contraction in the quantum consumed was as severe as 42%. In spite of this overall volume drop, turnover increased by 1 287% to $42,2 billion on the back of a rather aggressive pricing policy.
Operating income grew by 1 900% to $13,2 billion, out pacing the official average inflation rate for the period of 1 107%. This was achieved mainly through stringent cost controls, rationalisation of senior management. The strategic intent was to maintain operating margins.
The operating profit figure includes a revaluation on returnable containers of $3 billion which if excluded results in growth reducing to 1 400%. Operating margins were not only maintained but actually firmed from 26% to 31%, which management has always indicated is their target figure for the margin line. In terms of segmental business contribution to operating income, beverages accounted for 67%; Ariston 11%; and Plastic and Glass both weighed in with 8% whilst Kwekwe Maltings contributed the balance of 6%.
Cash generation remains strong, with inflows from operations of $6,1 billion, of which most of it found its way into stocks. Consequently finance income performance was not as strong with only $725 million being credited to the income statement.
The revaluation of the biological assets, in subsidiary Ariston, contributed $1,2 billion whilst Delta’s share of associates’ profits amounted to $232 million. After appropriations to the taxman and minorities, $11,3 billion was what was attributable to shareholders.
This translates into a return of 1 664% over the comparative 2005 period. Not a bad return for the ZSE behemoth that in normal circumstances would be expected not to outrun inflation but lumber along in line with it.