HomeBusiness DigestIt’s politics not the market. Stupid!

EPL title: It’s not over till the fat lady sings

RECOVERY was the buzzword for 2009 across the globe. This was after a devastating financial crisis which started off in the US in 2007 worsened into a worldwide economic recession.

Many countries are now officially out of the downturn although renewed fears have resurfaced particularly in the Euro zone.

Greece is the worst affected with concerns that it may default on its debt if the European Union does not step in to assist. Portugal, Ireland, Italy and Spain together with Greece form the disreputable PIIGS group of EU members are facing serious fiscal problems.

Zimbabwe also staged a dramatic comeback in 2009 after the inclusive government ditched the local dollar for multiple foreign currencies.

On the basis, it must be admitted, of some rather tendentious calculations, the economy is projected to have grown by 3,7%, the first positive growth since 1999.

In line with that growth, the stock market also rallied as strong earnings performance was anticipated. It gained more than 50% in 2009.

Many investment professionals expected that 2010 would be a year when quality growth companies with good earnings prospects will stand out and lead the market.

Econet, for one, was expected to be a star performer this year particularly as the company continues to increase its subscriber’s base. It is no secret that CBZ and FBC are benefiting from public deposits and could post strong earnings growth.

Zimplow has already paid a dividend signaling that its earnings and cash flows could be looking good.

Lafarge could also have a compelling story with capacity utilisation above 70% while at lower than US20 cents Aico should be any stock picker’s choice. These stocks and others with good earnings prospects are expected to be movers in 2010.

That has not yet happened. Surely, we are barely two months into the year and also financial statements have not yet started coming out. But even then, it does not seem like the results will have any significant impact on the market.

So far this year companies with questionable fundamentals have outshone solid blue chips. This surely has nothing to do with current or projected company performance but is rather a reflection of the calibre of investors in the market.

Small investors with a preference for penny stocks have been dominant at a time foreign buyers who love to buy quality stocks are not active in the market.

As at  February 17 the top performing stock was ZPI with a 50% uplift on the price of December 31 2009. The only quality stock on the top five list which also includes Trust, Phoenix and Dairibord is Barclays.

ZPI, like all property companies is grappling with subdued rentals, low property sales and high void levels as tenants either closed or moved out of expensive properties to contain costs. It is not clear what business Trust does currently outside their attempts to get back their assets from ZABG.

For Phoenix it is a question of a business model in the wrong place at the wrong time. Seriously, who cares about brooms, or brushes when his stomach is empty.

Dairibord used to be the leading supplier of liquid milk and milk based products in the jolly-good old days but not anymore. This is largely because of the decimation of the dairy industry although internal shortcomings are also to blame.

Do they sound like stocks that should be on the top of the performance table? Surely not! The other counters occupying the upper quartile are Astra, BAT, TSL, NTS, Pioneer, Willdale, CBZ, Dawn and TN with gains in excess of 15% during the period under review. Fundamentals for all, except CBZ, and, probably TSL and BAT, are weak.

There is nothing to justify the rally in these stocks particularly when most ZSE bellwethers are occupying the mid-table.

The likes of Econet, PPC and Delta are trading at their December 31 levels while Hippo, Seedco and Old Mutual are among the heavily capitalised stocks with prices lower than they last traded at in 2009. Retail investors are exploiting the volatility of penny stocks to trade in or out when the prices are favourable while big caps remain inactive as foreign investors steer clear of the market.

This situation should not be surprising especially considering all the doses of negative information dominating the economy.

First was the logjam that hit the inclusive government after Zanu PF refused to make further concessions during political talks until the MDC-T convinced the West to drop sanctions.

That demand was spurned and this week the EU extended the sanctions by another 12 months.

The standoff on this issue was a sure sign of discord amongst politicians and this unsettled the capital markets.

The gazetting of the regulations on indigenisation by government appears to have killed off investor interest completely. Ironically, when the regulations were announced the country was preparing to host an investor’s conference aimed at luring foreign capital into the country.

The regulations rendered the conference largely useless. A country where investors are compelled to sell 51% to indigenous partners cannot be a good investment destination.

Surely any indigenous person who can pay for 51% of a company valued at more than a million dollars should just start his own business. That way the economy grows and everyone benefits. Local investment is not a zero sum game.

 

Ranga Makwata

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