Impending litmus test for ZSE

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Stocks have registered a good run since the beginning of the year.

By Victor Makanda

The rally has seen US major indices, the Dow and S&P 500, logging significant year-to-date returns of 18,62 and 18,64% respectively as at July 19, 2013.

In Europe, the FTSE rose 12,42% while the Nikkei 225 which is a proxy for the Asian market pocketed a solid 40,35% return. Global stocks have thus managed to be resilient despite being spooked repeatedly by the on-going debate on when the loose monetary policy stance by the US Fed will be cut and ultimately terminated.

Frontier markets in Africa have also cashed in from the global stocks rally with Ghana leading with a solid 58,78% year- to-date return for the same period to July 19, 2013.

Zimbabwe has also managed to ride on the wave managing a return of 48,98% while Nigeria and Kenya trailed behind with 36,53 and 27,96% respectively.

What is mainly interesting is the performance of the Zimbabwe Stock Exchange which continues to log record highs despite the elections build-up.

As at July 19, 2013 the industrial index stood at an all-time high of 227,03 points and was up 1,40% for the week driven mainly by selected heavyweights BAT, OK Zimbabwe, Old Mutual and Hippo.

Trading activity as measured by weekly turnover also mirrored the upward trend in the industrial index as it improved by 136% to US$21,15 million.

The US$21,15 million turnover subsequently became the highest weekly figure for the year displacing the last high of US$17,10 million recorded in the week ending February 8, 2013.

Special bargains in Astra and Natfoods worth US$5,50 million and US$1,79 million lifted turnover.

Delta and Econet normal trades worth US$5,0 million and US$2,12 million were also a game changer. Offshore investors remained net buyers on the local bourse as they bought and sold shares worth US$10,55 million and US$8,80 million respectively.

The outlook for equities if one is to draw conclusions from the recent bullish trend in the past seven months, would clearly be a further upward trend. Profit-taking periods should be witnessed but the trend is likely to remain positive.

The search for higher returns mainly in frontier markets from the excess liquidity from several money printing presses in advanced economies continues to be the major driver.

Investors’ huge appetite for stocks even ahead of the national polls to be held on July 31, 2013 also signal a scenario of a relatively low political risk tag compared to the 2008 polls.

The question is: Will this view hold up after the elections?

Professor Tony Hawkins on July 16, 2013 released an economic outlook paper for 2013/14 which may present some possible scenarios on the direction of the broader economy as well as for equities.

The election outcome according to the report remains the significant determinant on how things will pan out post July 31, 2013. A scenario where elections are credible will have huge benefits on the economy in that financial support from multilateral institutions will increase.

This is expected to see Zimbabwe’s share of foreign direct investments (FDI) increasing from the paltry 0,8% received in 2012 from the total US$50 billion inflow into Africa.

The inflows would also see liquidity improving, in turn having multiple benefits to all sectors in the economy as opposed to the current contraction caused by illiquidity.

Equities would then benefit as portfolio investments from fund managers across our borders increase. Mergers and acquisitions which are expected to rise due to huge opportunities that are inherent in Zimbabwe will also lift equities performance.

While a scenario of credible elections may be a possible outcome, the flipside of the coin has a scenario of another government of national unity (GNU).

With such an outcome stability in terms of inflation and availability of food stuffs is guaranteed. Economic growth despite slowing down may remain in positive territory though way below the 5% growth rate that had been touted by the ministry of Finance.

However, the big risk will be the continued policy inconsistency which may see foreign capital flight and a worst case scenario of reduced FDI inflows from the already low rate of 0,8%. The on-going liquidity crisis will persist as the solution to the crisis requires fresh capital which is scarce in the local economy.

Thus absence of long-term capital and working capital would see recapitalisation efforts by corporates being more of a fantasy than reality. Depressed demand may continue to persist hurting the corporate world in terms of revenues and profitability across all sectors.

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