BY TAFARA MTUTU
After two weeks of bull runs, the Zimbabwe Stock Exchange (ZSE) has begun bleeding red. Between March 11 and March 15, 2021, the exchange lost 4,5% of total market capitalisation. Delta Corporation, Padenga Holdings and Econet Wireless were among the blue-chip stocks that lost the most value after shedding 8,9%, 9,9% and 9,5%, respectively. We also note that the bloodshed coincides with the ease in lockdown restrictions since March 1, 2021 and the announcement of school openings in phases, beginning with exam classes on March 15, 2021. We opine that the decline is being driven by (i) constrained liquidity, (ii) profit taking, (iii) capitalising businesses after the lockdown, and (iv) the need to fund tuition payments, which we delve in detail below.
Liquidity, or lack thereof, is a major source of risk in listed equities. Low liquidity usually triggers haircuts on share prices as investors fight for the few available funds on both sides of the trade. The liquidity profile of the ZSE is often characterised by few institutional and high net-worth players that command the bulk of liquidity. As a result, when some of these entities withdraw liquidity from the market, a liquidity drain usually ensues. When adjusted for trades done by these large entities, we observe that liquidity has steadily declined since the beginning of February.
In the absence of these large players in the market, we note that the market responds to low liquidity by losing momentum. From the beginning of the year to the beginning of February — when there was more liquidity — the ZSE’s market cap increased by 36,4%, but only 17,7% from February to March 2021, a period that had low liquidity compared to January. In addition, the central bank mopped ZWL$2 billion in liquidity from the market through issuances of saving bonds and further curtailed liquidity on the ZSE. We also observe that, over a 5-year period between 2016 and 2021, liquidity waned in March and April before recovering in June in what seems to be a market anomaly associated with different months of the year. With the relationship between liquidity and market capitalisation in mind, it stands to reason that the time to consider buying stocks is in March and April when the market is depressed by a low liquidity.
There is also a strong perception that the ZSE has rallied beyond fundamentals and this has triggered profit-taking by investors across the board. Renowned value investor Warren Buffet uses the market capitalisation-to-GDP ratio to ascertain whether the stock market is overvalued or not. The stock market is said to be overvalued if the market cap-to-GDP ratio is above 0.8x; fairly valued if it is between 0.5x and 0.8x; and undervalued if it is below 0.5x. However, these figures are usually lower in economies that have extensive private and informal sector activity relative to business listed on stock exchanges. The market cap-to-GDP ratio for the United States in 2019 was 1.47x, while the 2019 average for select countries in sub–Saharan Africa is 0.21x. Zimbabwe’s market cap-to-GDP ratio between 2010 and 2020 years averaged at 0.19x, down from 0.60x in 2004 on the back of a myriad of factors that include low fixed capital investment, foreign investor exodus, and a growing informal economy. In 2020, Zimbabwe’s market cap-to GDP ratio had fallen to 0.12x but it has spiked to 0.17x in the first three months of 2021, and this has underpinned the perception of overvaluation of local equities. However, given the historical average of 0.19x, the rally that ZSE has experienced is likely a re-rating of the local equities market to historical averages, and any decline in the real value of ZSE’s market capitalisation will reverse upwards until the market cap-to-GDP settles at the historical average of 0.19x.
We also note that the ease in lockdown restrictions jolted an economy that was financially incapacitated given that the country had not yet recovered from the festive season when the first lockdown of 2021 came into effect on the 5th of January. The need to restock inventories following a period of constrained business activity and incomes has prompted business players to dip into funds invested in the stock market to jumpstart their businesses. The severity of these investors’ withdrawal from the stock market is also premised on the fact that many businesses resolved to invest sizeable portions of their ZWL balances in the stock market in a bid to hedge their cash balances against inflation since 2019.
This has also been punctuated by an imperative to pay tuition following an announcement that schools are to resume classes on the 15th of March 2021, barely two weeks since the economy was reopened by the president. Adding to the bloodshed on the ZSE was parents whose incomes were constrained during the 2021 lockdowns who scrambled to their savings on the stock market to fund their children’s tuition requirements. Any market survey in the country will bring to light the fact that the average expenditure on education now commands over 40% of a typical family expense basket. In some extreme cases, a typical family’s monthly disposable income is insufficient to fund their dependants’ school fees because of an increase in tuition by educational institutions beyond the average consumer’s wallet.
While this would have been immaterial before, the surge in retail investors that is being driven by the ZSE Direct platform has seen share price volatility increase since its launch in September 2020. The retail investors’ platform was built to encourage a culture of savings that has been virtually non-existent in over a decade. Since 2004, Zimbabwe’s gross domestic savings as a percentage of GDP has averaged around -6.8%.
In comparison, the 2019 global savings ratio is 25.7%. Therefore, the platform is a response to the poor culture of savings in Zimbabwe, and it has been welcomed by many in the country. A brief look at the ZSE’s equities price and volumes trends will show increased price volatility being driven by volumes that are not in the purview of the typical institutional investor, but rather the retail investor. We assert that many of these investors are now being forced by the current economic demands to withdraw their funds and, in turn, liquidity on the ZSE.
Given the depressed prices on the ZSE, investors have the opportunity to take positions in stocks that have been bleeding because of liquidity. Of the 50 counters that are currently listed and actively trading on the ZSE, 44 (88%) are currently trading below their year-to-date highs despite immaterial change in their business models or earnings forecasts. Many of these stocks have potential upside that will materialise to the tune of their respective YTD highs when more liquidity finds its way into the stock market.
Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or email@example.com