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Tall order for equity investors

The just-ended year was one of reckoning for the Zimbabwean economy. Optimists among us who believed the momentum of fast-paced growth achieved since 2009 could be maintained were eventually forced to come down to earth.

Report by Collins Rudzuna

Perhaps the most memorable such case is that of the Minister of Finance, Tendai Biti, whose official forecast for GDP growth was twice revised downwards — from an initial 9,4% to 4,4%. In coming up with expectations for 2013, it is important to consider what exactly went wrong last year.

To begin with, in many quarters, the economic growth enjoyed since dollarisation seems to have been taken out of context. While many touted the fact that Zimbabwe’s economy was growing faster than regional comparatives and similar economies elsewhere in the world, most punters conveniently or inadvertently failed to recognise that we were in recovery mode. What the economy was experiencing was the proverbial “dead cat bounce” after years of remission, thanks mainly to dollarisation.

Strictly speaking therefore, one obvious reason we were running faster than the pack was that we were playing catch-up.

Firm metal prices which coincided with this fortuitous recovery benefited the mining sector and helped spur growth. The relatively slow growth rate of 4,4% expected in 2012 is, however, alarming in that it represents the running out of steam of an economy that still has much ground to cover.

Without dwelling too much on the past, economists, investors and ordinary Zimbabweans are no doubt considering the prospects for the coming year. An old joke says “to believe you can have unlimited growth in a world of finite resources you would have to be either a fool or an economist”. In our country’s case perhaps the most needed resource right now is money. And it sure is finite! Without raising capital, it is virtually impossible for the economy to remain on a growth path.

The fact we are forced by circumstance to use foreign currencies makes capital-raising all the more difficult. Attracting foreign investment is the only quick and viable option for raising capital. Yet some policies that government has put in place seem to be working against this goal. The indigenisation law, as currently constituted, appears to be scaring away potential investors.

A case in point is the recent Barclays/Absa deal in which Zimbabwe was excluded from an Africa-wide deal involving operations in 10 countries across the continent. Banks are currently battling to raise capital to meet regulatory minimum levels which were revised upwards to US$100 million. The total capital required for the whole industry to comply is estimated to run into hundreds of millions. Uncertainty over the upcoming elections is also bound to keep some potential investors at bay, further limiting the country’s capacity to raise capital.

Despite last year’s challenges the stock market managed to scrape through with a gain of 4,48% for the mainstream industrial index. Although share prices of listed companies had a lacklustre performance for the greater part of the year, a late spirited run by the blue chip counters was enough to salvage the overall index’s return.

The market’s biggest counter, Delta, was one of the star performers, reaching an all-time high of US$1 per share and having capitalisation in excess of US$1,2 billion.

In fact, it is fair to say the market’s positive showing for last year can be attributed to a handful of blue chips, otherwise the general trend was nothing to write home about. Delta gained 43% in 2012. Other notable blue chips that carried the day included BAT, up 132% and National Foods which gained 53%.

Given the bleak outlook for the economy, it is likely investors will be even pickier and more averse to risk than they were in 2012. Foreign investors perhaps, even more so, considering we are in an election year. Foreigners have in the past placed a high political risk premium on Zimbabwean investments and this negative sentiment would naturally be higher in an election year. Should this turn out to be the case in 2013 as well, then the stock market is set for a year of less active trading and depressed share prices. More than last year, trading activity is likely to be concentrated in just a handful of only the best quality counters.

Traditionally, Delta and Econet, which are favoured by foreign investors, have accounted for almost half of all the value traded on the market. Aside from these two, investors are likely to concentrate on defensive counters that present low risk.

Stock markets have been known to pull surprises and even exhibit behaviour which seems divorced from the economic reality on the ground. The year ahead, however, seems to be a make-or-break year for the economy and investors are obviously hoping for the best.

Is it reasonable to expect the best? An unpredictable political environment, a slowing economy and an uncertain world environment do not set the tone for good times for stock market investors.

Perhaps investors had better tighten their seatbelts for what may be a bumpy ride.

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