The stock market is a good barometer of economic activity and investor sentiment. Since mid–2013, the market has been in free-fall.
Last year, the Zimbabwe industrial index fell 19% and is down a further 27% this year. Since July 2013, the market is down over 44% and has lost over US$2,6 billion in value terms.
The mining index is even worse, reversing all of the gains it made last year (+56%), declining 68% this year. Market turnover has also collapsed with volumes down over 60% this year.
Between 2009 and 2012 average daily turnover exceeded US$2 million, since then turnover has declined to less than US$700 000 with trading on some days falling below US$15 000.
According to the CEO of the Zimbabwe Stock Exchange, Alban Chirume, turnover is expected to decline to US$250 million this year from US$453 million in 2014. Is it not palpable what these figures imply?
Investor confidence has all but evaporated. Over the last few years, there has been a significant increase in foreign participation on our market, as domestic liquidity has dried up. Foreign activity has grown steadily from less than 34% in 2009 to over 55% today.
Domestic investors, including pension funds, lack liquidity and have been absent from the market for some time now.
This week Delta fell below US$0,80 while Econet traded at US$0,18. It is difficult to digest that less than a year ago Delta traded at US$1,40 and Econet traded at over US$0,80. The market is extremely pessimistic as if anticipating a worst-case scenario for Zimbabwe.
Both Delta and Econet reported lower-than-expected earnings as economic growth has stalled. Their recent results reflect the gloomy state of the economy.
In the case of Delta, there is increased competition forcing the company to lower margins in order to protect its market share. Delta results also reflect a change in consumer behavior, as consumers have switched from the higher margin premium products such as larger to lower margin sorghum beer. Soft drink sales have declined as consumers have switched to cheaper imported soft drinks.
While recent corporate results have been somewhat disappointing, the market has been extremely unforgiving and a number of investors (mainly foreigners) have exited, stoking a downward spiral on share prices.
The great investor Ben Graham said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
In the long-term the company’s fundamental intrinsic value will drive the price of a company’s stock, but in the short-term stocks move on emotion and publicity that are not necessarily a reflection of their true underlying value. Well capitalised and well managed companies like Delta and Econet have great long-term prospects that are not reflected in current prices. However, investors are clearly nervous and are willing to exit the market at any price.
Undoubtedly there is great opportunity for long-term investors. Stock multiples have declined and are the lowest in the region. I expect the market may fall a further 5–10% this year, but am hopeful that it will bounce back next year as some of the benefits of economic reform bear fruit.
The debt restructuring with international financial institutions, including the settlement of arrears with the World Bank, IMF, and African Development in March/April 2016, will certainly have a positive impact on the market. Debt restructuring needs to be supported with the necessary economic and investment reforms. In the meantime the market appears to have lost faith though. Investor confidence needs to be restored urgently and the imperative economic and investment reforms fast-tracked.
If the market is anything to go by then 2016 is likely to be another wretched year for Zimbabwe. On the other hand, any economic progress the country makes next year is likely to boost the stock market. The market is desperately searching for a catalyst.
Resolution of the political uncertainties, debt restructuring and clear economic and investment policies is likely to spur the market. In the meantime, the market will continue to drift lower as investor confidence wanes in Zimbabwe.