‘Green shoots’ for others, not on the ZSE!

OPTIMISM of an improving recession in the global economy continues to push most markets up. From their lowest levels in March this year, stock markets in the US, Europe and Japan have recovered by more than 50%. Prior to this recovery, some investors had turned to the emerging economies of Brazil, Russian, India, China and South Africa.

The BRICS, as this group is known as, was not as badly hit by the credit crisis and the subsequent recession as were more industrialised countries.

Zimbabwe, although not considered an emerging economy in the sense of the Brics, somehow received considerable investor interest in April and May after resumption of trading. At that time the ZSE had emerged as the best performing market in the world buoyed by anticipated economic revival.

Incidentally the ZSE became lifeless from July when economists in the developed countries started talking about “green shoots”. Green shoots is a term used to indicate signs of economic recovery during an economic downturn. With more stable economies anticipating positive growths, some investors are reviewing their decisions to switch to emerging markets.

It is likely that many that had left exchanges such as New York because of the financial crisis could be thinking about going back, if they have not done so already, now that the future looks promising in those markets. Only sound and stable emerging markets will be able to retain these investors. Unfortunately Zimbabwe is not one of them.

For a long time now market players have been wondering when the market will recover. Zimbabwe, they argue, has cheap assets with better chances of generating high returns in the future. They seem to forget the high political and economic risks in the country. It will be interesting to compare the risk-adjusted returns, not absolute, of Zimbabwe against other competing countries and see if the argument on returns would still hold. Chances are the country may come out last.

Besides the political problems the country is ranked one of the worst places to do business in. Events such as the recent specification and suspension from trading on the ZSE of Kingdom Meikles seem to give credence to this notion. Even though there might be genuine reasons to specify the group, the message sent across the world is that private property rights were violated.

If this could happen to someone who has been an investor in the country since the 1890s then potential investors can be excused for being sceptical. Already KML investors, who include foreigners, are losing out as their shares are not presently tradable. Such investors would not want to invest in the country again and it will be difficult to correct this perception.

To then expect the market to recover against such bad news will be stretching optimism to unreasonable levels. Bad news only sells for newspapers. On the financial markets, only positive information attracts investors. Without participation of foreign investors, the stock market will remain wobbly.

For almost eight consecutive weeks the market has been quiet with isolated activity on big companies such as Delta and Econet. Foreign investor interest in these two is still there although buyers prefer to wait for price weakness before jumping in.

Positive week-to-week trading was only recorded in the period to September 18 when the industrials gained 4,03%. Although since then the market has been strong, the current rally should not be mistaken for a return of the bulls.

It could be the typically ramping up of prices by some fund managers ahead of the third quarter performance-reporting period. If that is the case, then the market should be back to directionless trading come October.

A non-trending market is not suitable for the buy-and-hold strategy which most of the local fund managers are fond of. More so, investors should not expect to make money in the interim by buying into the usual line-up of Delta, Innscor, Econet, Rio Zim and Old Mutual. More money can be made from identifying good mid-caps and even some penny stocks in a trading approach. Year to date, many of these shares have outperformed the blue chips.

Judging by the June results released so far, small manufacturing companies with less capital expenditure are steadily coming out of the dugout. A case in point is Zimplow which has increased capacity at its implements factory in Bulawayo from 10% in December 2008 to 60% presently. Monthly revenue of nearly US$900 000 now is no mean feat for a company which turned over only US$2 million in the six months to June.

Taking into account after-tax margins of 25%, the company can easily achieve profits above US$2 million in the rolling 12 months to June 2010. Zimplow is trading at a market cap of only US$3,28 million and any average analyst should easily see that discrepancy.

Another company with a promising future, all things being equal, is Turnall. Revenues for the six months to June were US$3,9 million but indications are that the company could be currently earning more revenues. Again this is a high margin business which is operating at more than half of the available capacity.  The market capitalisation of the company is below US$10 million, possibly being weighed down by shareholder wrangling as Mutumwa Mawere battles to reclaim the assets from the administrator.

Ranga Makwata