The stock market embodies perception, economic value and economic growth indications. The underlying performances of companies on a listed bourse mirror the environment in which these companies operate. Improving company earnings often reflect higher production volumes and firming demand. This often translates to improving stock market valuations.
This scenario is one of the many that prevail in a real market, but that these performances are directly related to the economy is universally accepted.
The ZSE has experienced massive volatility over the past few years, particularly beginning 2019, that is the period when the Zimdollar was reintroduced. As it attempted to find balance the stock market swaved with it. However these movements were largely one sided, which is southwards. Since its floatation, the currency has been losing ground to the USD dollar. In 2019 and 2020, the local unit shed 80% in respective years.
The depreciation in the currency meant reciprocating inflationary pressure. Inflation rose peaking at 830% in July of 2020. This level was considered as hyperinflation. Now these developments resulted in the stock market responding in a significant manner. Like all other commodities valued in Zimdollar, yet maintaining a real underlying value, stocks began to go up countering the impact of currency depreciation and unlike real goods, stock markets come with speculation and factoring of future effects into the price.
Valuations such as those based on multiples have a forward price based on future performance. So if an entity is expected to outperform in the near term, its share price responds immediately even before real value is created. So for an economy expecting further inflation, prices reflected higher than normal valuations.
This is clearly demonstrated through the Old Mutual Implied Rate (OMIR), which showed a huge premium to the auction market as well as the parallel market.
This was because the price of stocks is typically forward priced and highly speculative in an inflationary environment. We have therefore generally seen a rising stock market in nominal terms between 2019 and 2020.
The ZSE went on to rank as the best performing sub-Saharan stock market in 2020 with real growth of over 100%. This feat is likely to be replicated in the current year.
This piece is meant to review performance for the nine months period to September 2021. So far in the year, the ZSE has rallied strongly, extending last year’s performance. The bourse is up 180% in nominal terms, but after adjusting for the exchange rate, the real return gets lower at about 90% using the parallel market rate. Using the official exchange rate the real return is upwards of 150%.
The exchange rate has barely moved in the formal market, having started the year at 1:85 and currently trading at 1:87, a marginal decline. We prefer to use the parallel exchange rate, because it clearly reflects what retail investors would reap, if they had committed to investing.
This bracket of investors has no equal access to auction funds compared to institutional investors.
The strong performance so far in 2021 defies some of the trends. For example, inflation has risen only by smaller margins. The year-on-year inflation outturn has improved from 830% a year ago to about 50% as at August 2021.
This trend would typically slow down the rate of growth in stock market prices. We think that stock market defiance has been driven by a number of factors. There are now two segments in the economy. The segment that is highly informal and uses the parallel exchange as a proxy for pricing in ZWL.
This means this segment adjusts ZWL prices using the prevailing parallel exchange rate. Since we highlighted that the parallel exchange has tumbled by 50%, it would follow that the stock market would rise by a higher figure and thus defy the official inflation trend.
The official inflation trend is computed against mainstream prices, quoted by retailers and producers who have access to the auction.
The strength of the stock market has also been propelled by a resurgence in demand. The demand we are seeing is on company volumes. Listed companies are experiencing a rebound in volumes of double digit, some even upward of 50% driven by a clawback in purchasing power as inflation subsides.
There has also been a wholesale adjustment in incomes across the civil and private sectors, which has allowed for consumers to claw back purchasing power. Companies have likewise found the environment to be much better, particularly concerning the availability of foreign currency, which has enabled the importation of raw materials and payments of foreign creditors.
For some players, the weaker Zimdollar has created opportunities for regional market expansion. This has also contributed to volumes growth. Companies have also highlighted that the more stable economic environment has allowed for planning, pricing and stocking to be done in a manner that ensures sales volumes growth.
While we see the positives and also believe that they support the rising prices, we are of the view that much of the growth being experienced on the stock market is risk-aversion driven.
We are of the view that inflation is likely to retrace northwards again getting into 2022 and the pressure will be much higher as we head towards elections. We already see money supply growth as concerning and that it could stoke serious inflationary pressure, as early as November 2021.
Pockets of opportunities are visible on the stock market, but caution has to be taken. Bluechip counters such as Delta and Simbisa have made significant strides in diversifying their operations and have invested heavily through acquisitions, thus creating real underlying value.
Some of these counters protect value on the short run, but are equally rewarding on a long term horizon.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org