BY TATENDA MAKONI
THE operating environment in the first half of 2020 was characterised by hyperinflation as well as volatility in the parallel market hinged on a background of an exchange rate peg within the formal banking system.
Annual inflation peaked at 837,58% in July 2020 and gradually declined to close at 348,59% in December 2020.
Activity on the stock market was primarily driven by inflation hedging by local investors.
The environment stabilised from the second half of 2020 going into 2021 necessitating a return to fundamentals for investors.
As seen from the sectoral analysis, the banking sector outperformed the rest, driven by FBC Holdings and CBZ Holdings.
The price movement was not necessarily a reflection of improving fundamentals but rather aggressive demand from strategic buyers.
By the end of 2020, CBZ had displaced Delta Corporation Limited as the largest company on the Zimbabwe Stock Exchange (ZSE) by market cap.
The ZSE opened the year with 60 counters and closed with 56 after the delisting of Seed Co International, ZPI, Falcon Gold and Power Speed.
Further delistings followed in the first quarter of 2021 as Dawn and Seed Co merged with African Sun and Seed Co International, respectively.
The introduction of the foreign currency auction market in June 2020 saw parallel exchange rate premiums plummeting from circa 300% to 48%.
Since the introduction of the auction system and SI 185 Exchange Control (Exclusive Use of Zimbabweandollar for Domestic Transactions) (Amendment) Regulations, 2020, the exchange rate has remained stabilised at around US$1: ZW$85.
As the currency stabilised in the second half of 2020, and the environment found some equilibrium, building a view on earnings became clearer, increasing general confidence.
This gave rise to corporate activity on the stock market as businesses became more aggressive, consolidating upwards and downwards to create scale and improve efficiency.
Some examples of these include the acquisition of 100% of Dawns’ share capital by African Sun, ZHL acquiring a control block in Fidelity Life Assurance (FLA) and Sotic International completing their takeover of BNC.
The Victoria Falls Stock Exchange (VFEX) was launched in October 2020.
The exchange trades in foreign currency with the aim of attracting external investors.
So far, the exchange’s listings are Padenga Holdings and Seed Co International, which has been relatively illiquid.
Old Mutual and PPC are expected to delist from the ZSE in favour of the Victoria Falls Stock Exchange (VFEX).
The ZSE was the best performer in sub-Saharan Africa rebased to US dollars, as the All-Share Index closed 2020 up by 135% y-o-y as investors’ quest for capital preservation drove demand followed by the Nigerian Stock Exchange, up 40% y-o-y in 2020.
Reviewing trading updates for the quarter ended December 2020 of consumer facing businesses like Delta Corporation, Innscor Africa Limited and Econet Wireless Zimbabwe, there was a marked improvement in trading volumes albeit off a low base post the Covid-19 induced lockdown; a signal that consumer spend was more robust than expected under the circumstances.
Latest reports are implying a potential harvest of circa 2,8 million tonnes of maize for the 2020/21 agricultural season.
Since 2013, the peak production season was 2016/17 with 2,1 million tonnes.
Tobacco output in 2021 is estimated at 205 000 tonnes (tons) relative to prior season at 182 000 tons while yields are expected to be higher.
In the April edition of the World Bank commodities outlook, tobacco prices are forecast to marginally increase in 2021.
It is estimated that around 70% of Zimbabwe’s population is employed directly or indirectly in agriculture hence an improved agricultural season directly impacts consumer liquidity.
Agriculture also supplies 63% of agro-industrial raw materials to the manufacturing sector implying a direct knock-on effect to input costs.
Business volumes in the first quarter of 2021 were adversely affected by the Covid-19 induced lockdown, however, there will likely be a recovery in the second quarter as restrictions ease, tobacco auction floors open and maize deliveries to Grain Marketing Board (GMB) begin.
Food processing and food retail stocks will directly feel the impact of increased liquidity on their earnings base. Of course, the possibility of a 3rd wave of Covid-19 presents a significant downside risk.
Month-on-month inflation has trended below 10% from August 2020.
Should the trend continue, annual inflation is likely to close the year below 35%, a positive development for the banking sector that had been charging sub-inflation interest rates.
Companies servicing the infrastructure industry such as Proplastics Limited, Masimba Holdings Limited and Lafarge reported improvements in their order books for the second half of 2020 implying growth in capital spend.
Going into 2021, individual housing projects and government’s planned budgetary allocations to general construction, will be determined by the extent of the pandemic’s effect.
The underlying companies on the ZSE are set to benefit from a seemingly stable operating environment and an increase in consumer liquidity.
Company earnings will be driven by volumes growth rather than inflation induced price adjustments.
Several counters have invested in their earnings capacity over the past two years and are still trading below their replacement values in real terms, presenting an opportunity for long-term investors.
Makoni is an equities sales trader at IH Securities. — tmakoni@ihsecurities .com