SHORT-TERM macro outlook for this year remains difficult amidst low commodity prices, balance of payments deficit and foreign direct investment (FDI) inflows remain critical.
The economy continued to underperform, yielding tepid GDP growth of 1,5% in 2015 versus Sub-Saharan African (SSA) peers at an average growth of 3,8%. Key macro-growth sectors, agriculture and mining, both contracted in 2015 affected by unfavourable weather conditions, pervasive structural issues leading to low funding and softening commodity prices.
A large current account deficit (+/-30% of GDP) coupled with low international reserves continued to threaten the country’s external position (deficit in FY15: US$2,9 billion vs FY14: US$2,7bn).
On a brighter note, we did observe a significant increase in the gold sector with output up in 2015, +22% to 18,7 metric tonnes; while we believe that the banking sector is now on stable footing.
Inflation remained negative during the year as it opened 2015 at -1,3% and closed the year at -2,57%. The Ministry of Finance has forecast a 2,7% growth for 2016 while the IMF and World Bank have forecast growth rates of 2,5% and 2,8% respectively.
The tourism sector is expected to support economic growth as well as an expected turnaround in agriculture and mining to yield positive growth. Adjusting for downside risks, our base case growth rate for the economy is 1,2%, well below SSA peers, expected to grow 4,3% in 2016. Going forward, we believe that the key drivers of the economy mining and agriculture will continue to be affected by weakness in global commodity prices and pervasive structural issues linked to poor funding and foreign direct investment in both sectors.
We maintain that there is a critical need for the country to compete for and attract the limited FDI; available for the region; however, an increasingly polarised political environment accompanied by policy inertia remains a significant impediment. Notably the indigenisation policy continues to be mired in political uncertainty without any key improvements in consistency of implementation. Encouragingly, we have observed a continued thawing in international relations, with progressive elements within government actively engaging with creditors and the foreign investment community.
Equities outlook for 2016
Keep an eye on earnings stabilisation as valuations appear to be coming back to attractive levels although shorter-term we believe stocks may trend lower before any potential recovery. Indications are to expect more of the same in 2016, particularly given the lack of visible, meaningful catalysts. We anticipate sustained pressure on consumer demand and a continued squeeze on liquidity.
Our immediate preference at this time is companies that have de-rated significantly from their five-year historical price-earnings ratio (PER) averages assuming relatively “stable” forward earnings. Our belief is that the downward momentum in earnings in these names has decelerated and will begin to level off in late 2016. From a fundamental perspective our top picks for the year are as follows Delta (TP US$1,02, PER 8,9x (+1)) on account of valuation, Innscor (TP US$0,54, PER 4,7x (+1)) continued strategies to unlock value in the group, Simbisa Brands (TP US$0,30, PER 13,8x (+1)) regional expansion while Econet (TP US$0,44, PER 11,3x (+1)) intuitively appears attractive, however we remain concerned around regulatory headwinds (tariffs).
Target market capitalisation for 2016
We forecast a base case target market capitalisation of US$3,42bn at the end of 2016, based on GDP growth of 1,2% and earnings growth of 5%, representing upside of 15% from this month. Downside risks to the forecast emanate from potential underperformance in agriculture, sluggish GDP growth and possible worsening in liquidity conditions.
Overall we remain neutral on Zimbabwe equities relative to the rest of SSA markets.
Inter-Horizon (IH) Securities (Pvt) Ltd is a securities trading company facilitating trade on the Zimbabwe Stock Exchange.