FBC Securities Research
THE stock market performed considerably well in first half of 2021, owing to undervaluation sentiments, high inflation and exchange rate depreciation. The major highlight for the first quarter was a CBZ trade worth ZW$2,5 billion involving Public Service Commission and an undisclosed Investment Consortium.
The second quarter of 2021 was largely characterised by growth in retail investors demanding small to medium tier equity securities. Resultantly the Small Cap Index jumped by 1 500 percentage points to settle at 190 131,5 as at end of June 2021.
The All Share Index moved up by 135% compared to December 2020 to settle at 6,194.88 points. The Top 10 and Mining Index increased by 89% and 50% respectively compared to December 2020. The foreign market was a net seller having sold ZW$5,84billion 68,2 million) and bought ZW$1,12 billion (US$13 million). Market Cap was up by 137% to trade at ZW$745 billion (US$8,7 billion) from ZW$317billion (US$3,7 billion) attained in December 2021.
Second half 2021 outlook is premised to remain positive on cautionary buying in light of creeping inflation and widening parity between the auction rate and the unregulated market rate which is currently circa 50%.
More so Zimbabwe Stock Exchange counters remains undervalued in USD terms and this maintains a steady consistent demand. As the operating environment remains fluid, structured transactions will linger to be a consistent feature on ZSE as companies adapt to the obtaining circumstances.
The Government, through 2019 National Budget Statement, announced its plans to establish an Offshore Financial Service Centre in the resort town of Victoria Falls in order to lure more Foreign Direct Investment (FDI).
The Victoria Falls Stock Exchange (VFEX) is nearing its first anniversary which is set for October 2021. So far, the bourse has only attracted two listings, that is for, Seed Co International and Padenga. Volumes traded to date havenot been inspiring year to date on the backdrop of counter liquidity and confidence deficit.
Beginning of July 2021, Caledonia Mining Corporation Plc announced its intention to list on VFEX following a cocktail of incentives announced by the government. Caledonia announced that its listing will be conditional on market conditions and government incentives thereof. The listing is earmarked to occur in the third or last quarter of 2021.
The OML ZSE Top 10 ETF
Zimbabwe became the fifth country in Africa to list an Exchange Traded Fund (ETF) following South Africa, Nigeria, Kenya, and Egypt. Exchange Traded Funds (ETFs) are essentially hybrid funds as ETFs contain certain feature of both open-end mutual funds and closed-end funds.
Old Mutual put the initial seed capital in the form of scrip in the exact weights of the top 10 index. The fund was then listed by a way of an Introduction on the Zimbabwe Stock Exchange. The ETF track the ZSE Top 10 counters, which are defined quarterly by Zimbabwe Stock Exchange.
ZSE, Top 10 counters at the end of April 2021 were Innscor Africa, Delta, Econet Wireless, Ok Zimbabwe, Meikles, Cassava, National Foods, Padenga, Simbisa and Zimre Holdings Limited. ETFs are designed to replicate the holdings, performance, and yield of their underlying portfolio or index.
Market makers, broker-dealers, and specialists are the majorplayers in the creation and redemption of ETFs; however, many individual investors hold ETFs for risk-control reasons, diversification, hedging, and short-term trading.
This means the investors are offered the opportunity to own the 10 underlying stocks through one investment in the ETF. Investors who wish to invest in the fund can do so through two ways, by buying units in the ETFs through any registered stockbroker or alternatively investing in kind by delivering a basket of stocks in the exact weights of the fund through an authorised participant.
The fund manager, Old Mutual Investment Group Zimbabwe, is responsible for periodically replicating the ZSE Top 10 index in line with the index ground rules. What makes ETFs attractive is that they are relatively cost efficient as these are relatively passive funds which attract lower fees as compared to traditional managed funds. ETFs are also transparent given that the underlying assets are fully disclosed to investors in their proportion.
The OML ZSE H1 performance
The Old mutual Top 10 Exchange Traded Fund began trading in January 2021 with 80 million units. The listing price was the Net Asset Value of the total securities basket which was ZW$1. Since a secondary market was created being driven by market forces, the ETF market price started drifting away from the Net Asset Value. At the end of June 2021 the Old Mutual Top 10 ETF was up by 79 percentage points to trade at ZW$1,79.
The Zimbabwe Stock Exchange Top 10 Index increased by 89 percentage points to settle at 13 250 between January and June. Given the increased demand on the ETF predominantly from the retail segment, the Sponsor (Old Mutual) increased units from 80 million to 131 396 526 units representing a 64% unit gain.
2nd half equities positioning
- Foreign exchange auction rate
The Foreign Exchange Auction System, which attained its first anniversary on June 23, 2021, has contributed immensely in bringing transparency in the trading of foreign currency as well as the stability in the exchange rate which has culminated in price stability.
After 56 Main and 50 SMEs auctions, a total of US$1,72 billion had been allotted as at July 27, 2021, representing 98% of total bids submitted to the auction. Reflecting the importance of the SMEs sector, the share of allotments of the SME Auction to total allotments grew from 3,5% in the thirdquarter of 2020 to about 14% in the second quarter of 2021.
The efficient allocation of foreign currency through the Foreign Exchange Auction System has contributed to increased confidence and growth in economic activity. Encouragingly, the Foreign Exchange Auction System continues to support the productive sectors of the economy with more than 70% of foreign exchange allotted going towards these critical sectors. Those in the manufacturing sector accounted for 17 out of the top 20 auction beneficiaries during the period under review. Ramping up of production has also been necessitated by the increase in investment, given that the foreign exchange auctions have so far outlaid around US$325 million, which has been utilised by businesses to capitalise their operations.
Similarly, response by the country’s manufacturing sector to the Foreign Exchange Auction System has been quite encouraging with 65 – 70% of products in the retail sector now being produced locally, a significant leap in import substitution.
Other entities are venturing into the export market. Increased capacity utilisation by industry has resulted in an increase in the demand for foreign currency on the Foreign Exchange Auction System. This saw demand rising from about US$30 million per week in December 2020 to around US$45 million per week in July 2021.
- Foreign exchange auction backlog
The Reserve Bank of Zimbabwe has put in place the following measures to deal with the residual foreign exchange auction allotment backlog:
- Utilisation of the existing letters of credit facilities for the importation of strategiccommodities and capital goods in order to lessen the demand on the Foreign Exchange Auction System;
- Supporting banks to promote financial intermediation to leverage on the current long foreign exchange position of around US$1,7 billion in the banking system; and
- Working closely with Government to ensure that some of the foreign exchange balances in the Exchequer Account are utilised to expunge the backlog.
Parallel market rate premium
The Reserve Bank of Zimbabwe plans to address the gap between the official and parallel exchange rates through tightening money supply, expunging the foreign exchange allotment backlog and increasing the attractiveness of the local currency so that the local currency complements rather than competes with the USD. It also plans to do so through discouraging rent-seeking behaviour and promoting sustainable behaviour and fair play in the foreign exchange market and provision of forward guidance to anchor exchange rate expectations and enhance business sentiment.
Encouragingly, the policies being implemented by Government and the Reserve Bank of Zimbabwe have managed to anchor inflation expectations as attested by a significant decline in inflation from 837,5% in July 2020 to 56,4% in July 2021.
Reflecting stability in the exchange rate, notable price increases in 2021 have mainly been recorded in regulated services including electricity, education, communication, and transport.
The increase in international oil and food prices also explained the rise in domestic prices during the period under review. The international prices of oil and most agriculture products rose by more than 20% since January 2021, crude oil price rose from an average of US$48,73 per barrel in December 2020 to US$71,80 in June 2021, impacting negatively on domestic inflation directly and indirectly through increases in production and distribution costs.
The Central Bank has continued with monetary targeting framework, which seeks to balance between inflation expectations and provision of appropriate levels of liquidity to support economic activity. The success of the conservative monetary targeting framework since 2020 has helped to contain money supply growth, which in turn stabilised the exchange rate and eased inflationary pressures in the economy. As at end of December 2020, reserve money was ZW$18,76 billion (US$219 million), compared to a year-end target of ZW$25 billion (US$292 million).
During 2021, reserve money growth target per quarter of 22,5% has been further tightened to 20% for the second half of the year in order to reduce speculative pressures that have the potential of destabilizing the targeted disinflation pressure.
As at end of June 2021, reserve money stock stood at ZW$24,17 billion (US$282 million) which was well within the target of ZW$28 billion (US$327,1 million).
Following reduction in the quarterly reserve money target to 20% for the second half of this year, reserve money is expected be contained within a target of ZW$29 billion (US$338,7 million) by end-September 2021, and to no more than ZW$35 billion (US$408,8 million) by the quarter ending December 2021 (RBZ 2021).
This is the last part of the 2nd Half Outlook Report by FBC Securities Private Limited.As a member of the Zimbabwe Stock Exchange, duly licensed by the Securities Exchange Commission, FBC Securities specialises in the facilitation of ownership and disposal of listed securities on the Zimbabwe Stock Exchange.
- Disclaimer: This document may contain certain FBC Securities Private Limited analysts’ opinion, expectations of performance and forecasts with respect to certain or all financial securities herein discussed.