ZSE: ‘Large Cap Bias’ worsens

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The value gap between the top ten listed counters on the Zimbabwe Stock Exchange (ZSE) has widened since December indicating a growing investor bias for large capitalised stocks, investment experts have said.

Report by Clive Mphambela

According to the latest figures obtained by businessdigest from the ZSE for the year to May 31 2013, the total market capitalisation of the exchange stood at US$5,471 billion, up 27% from the December close of US$4,121 billion, driven largely by share price growth in the top ten largest counters on the ZSE.

However, a closer inspection of the figures shows that the percentage share of market capitalisation represented by the top ten largest counters increased from 73% in December to 76% as at the end of May 2013. The statistics show that the top ten counters led by Delta (US$1,792 billion), Econet (US$654 million) had a combined market capitalisation of US$4,181 billion as of last Friday representing 76% of the total value of the ZSE.

Analysts said this phenomenon, known as “large cap bias”, has been a feature of the trading pattern on the ZSE since the market dollarised in 2009.

Head of Research at Invictus Securities Farai Vengesayi told businessdigest that one of the key factors driving the value gap between large cap and mid cap stocks was their strong financial performance since 2009. He said large cap stocks generally tended to outperform mid and small caps during periods of uncertainty.

“Investors look for safe haven stocks that tend to hold their value during difficult times. Secondly, liquidity is important, especially for foreign investors. They will therefore tend to invest in more liquid securities like Delta and Econet. Finally, large cap stocks like Delta and Econet have enjoyed strong operating performance in recent years which is only now being recognised by investors,” Vengesayi said.

He also said the large companies presented investors with liquidity, good performance and transparency as most of these companies tend to be extensively covered by analysts and their reporting was equally extensive and therefore more visible than the smaller companies.

“They also offer defensive characteristics. Most of Zimbabwe’s large caps stock is defensive by nature and the volatile economic environment make them even more appealing. Most of them are consumer facing, a sector most sought after amongst African equities. Africa is considered the last consumer frontier market,” he said.

Chartered Financial Analysts and Head of research at MMC Capital Itai Chirume said the increasing value gap was largely due to investors willing to pay a substantial premium for liquidity.

“An investor with US$2 million dollars will target the large caps as their shares are readily available, and the price discovery more predictable than the small caps. If you throw two million at some of the smaller companies you would not be able to get the right volume support your trade without a significant movement in price,” Chirume said.

He said some of the company values were so low that shopping with US$2 million could buy up some companies whole if the shares were sufficiently liquid.

“However, you find that if you lock up such and amount in a small cap stock, the investor may have challenges exiting because that block of shares may be attractive only to a few people.

Chirume also pointed out that most foreign investors on the stock exchange were portfolio investors who were looking for yield and risk diversification.

“They are not interested in owning a huge chunk of a small company, but a very small stake in a large well managed business,” he said.

These investors do not want to end up owning 20% of a small cap business that will give them an administrative burden for example by having to appoint members of the board or influencing management and strategy. This would give them an unnecessary administrative burden.

However, analysts dispelled the notion that local investors had joined the bandwagon, saying there was now a lot of “copy-cat” investing by local funds following the cue of foreign investors.

“Its unfair to say that. Our opinion is that they also follow performance like every other rational investor. Following smart money is also an investment strategy, it is in fact an art to identify that,” Vengesayi said.

“It’s also an indication of lack of depth in our market. The are very limited options for local investors and they do allocate some funds for the smaller caps and are responsible for the little activity in the second tiers and small caps.”

Chirume said local investors were also chasing value in the large caps due to local liquidity challenges.

It may be safer to bank your money for a short while in the large cap stocks because there is enough liquidity to exit positions with minimum risk of loss as the share prices are tending to be very sticky downwards as demand keeps the prices in the blue chips firm.

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