ZSE shares flattening out in the short term

ZSE shares are seen flattening out in the short term and possibly re-rating owing to a correction of valuation multiples towards the end of Q1.

By Chris Muronzi

Investment analysts see a possible re-rating of equities toward the end of Q1 as financials trickle in.

Analysts feel that while the Q4 rally was justified, a correction of valuation multiples will occur when financial and economic data filters in at the end of Q1, a development which could see share prices of some firms coming down.

The mainstream industrial index rose 46% in Q4 while the resources index rose 119% in the same period.

Companies with December full-year results have three months within which to report their earnings in line with exchange rules.

“We have seen the market go on a huge rally in the last quarter of 2016, with locals dominating the buy side over the period while foreigners were generally net sellers on the market,” an analyst said.

“Some of the gains appear justified given the economic and financial setting. However, I think that for the short-term most of these stocks are probably going to flatten out, leaving the market largely stable with minimal fluctuations in the near term. Towards the end of this quarter, however, when results begin to filter in and more economic updates come up, I anticipate re-ratings to drive the market with the direction largely dependent on the impact of the updates.”

On this year’s stock picks, he said there were too many variables to accurately forecast in the short-term.

“There are too many variables in the short term to precisely forecast the long-term outlook but, if the economy steadies, our expectation is that the companies should enjoy steady growth and consequently the equities market should rise in leaps and bounds,” he said.

Analysts say the foreign sell-off witnessed on the ZSE is a common phenomenon in emerging markets and not entirely peculiar to Zimbabwe.

“Our case has been on the persistently sell off position as the headwinds in global markets took their toll with investors opting for safer investment options as opposed to the highly volatile emerging markets,” the analyst said.

He said Zimbabwe’s persistent sell-offs however could be attributed to the faltering economy, making the investment case for local equities less attractive relative to other countries while potential risks from policy inconsistencies and currency risk stemming from bond notes.

Repatriation of dividends and payments to foreign investors is proving to be a nightmare since the beginning of cash problems.

Investment analysts say traditional stock picking at the beginning of the year has proven to be useless as fundamentals are being ignored.

Fund managers, who had adopted a general wait-and-see attitude owing to the dismal state of the economy, weak investor sentiment, poor government economic policies and Mugabe’s advanced age and lack of a succession plan, have been left with no choice but to move cash into safer investment classes.

“As a consequence, we are seeing funds migrating from cash and near-cash assets into equities. This, in our view, has been the primary driver of the market gains and is now being augmented by returning foreign demand in selected stocks,” an analyst said.

The mainstream industrial index declined 0,06% to close at 145,27 points on Monday while the resources index remained flat at 58,51 points on the same day.

Although some of the counters are already trading at peak prices, analysts say fundamentals have been ignored as most companies are already trading above their values.