HomeAnalysisZSE’s recovery beckons

ZSE’s recovery beckons

Tafara Mtutu
The Zimbabwe Stock Exchange (ZSE) is still licking its wounds after measures announced on May 7, 2022 by the president to contain the depreciation of the local currency saw the local bourse lose ZWL$655,6 billion in the few days that followed.

Among these measures was a suspension of lending operations to allow for investigations into the drivers of economic turmoil. However, this inadvertently struck the wrong chord with the business community until the suspension was lifted on May 17, 2022, only 10 days after.

During those days, we opine that many businesses were forced to liquidate some of their investments on the ZSE to stay afloat, and this underpinned the strong selling pressure on the stock market throughout the suspension.

As the old adage goes, one should never put all their eggs in one basket, and this has been the case with businesses in Zimbabwe. Keeping all their money in the bank has become risky over the past few years because of volatile policies, and we opine that this has prompted businesses to navigate the uncertainty by “diversifying their liquidity”, among other strategies.

Other avenues such as the physical cash balances and the stock market have become additional stores of liquidity which can be utilised in the event that traditional sources of liquidity dry up or become inaccessible.

We note that the stock market has garnered much favour with businesses and investors alike since the breakdown of the parity of the US dollar and bond notes, as the stock market was one of the first indicators of the “true” value of the local currency and then became the best store of value for ZW$ balances to date. Businesses increasingly invested excess ZWL balances in the stock market after the official introduction of the ZW$ in 2019 which was marked by the surge in inflation. The move was strategic in preserving the value of ZW$ balances given the additional scrutiny that many of these businesses are subject to that limited illegal value preservation efforts like buying currency on the parallel market.

Given the stronger focus on liquidity compared to earning real returns, blue chip stocks such as Delta Corporation, Innscor Africa Limited, and Econet Wireless have been top picks for portfolios for such companies. These stocks are some of the most liquid stocks on the ZSE, having proven management teams at the helm and a strong fundamental case for an investment in these companies. As a result, we opine that many businesses amassed holdings in these counters, among others, since 2019.

The soundness of spreading liquidity in many baskets became apparent when lending operations were suspended earlier this month. The suspension was a shock to manufacturing businesses who depend on short-term revolving credit facilities to bridge working capital gaps between production and sales.

We opine that this was severe among manufacturing companies who did not have liquidity buffers such as investments on the stock market.

However, businesses that had liquidity in the stock market swiftly liquidated some of their investments in these blue chips in the absence of credit facilities.

While these companies’ operations remained intact, the sell-off on the stock market triggered a bloodbath in investors’ portfolios with blue chip holdings.

Innscor’s share price shed 24% in the 10 days when lending activities were suspended, while stock prices for Delta and Econet were down 22% and 33%, respectively over the same period. Overall, the ZSE’s market capitalisation fell by 20%, or ZWL$655,6 billion.

Given that the ZSE Top 10 Index, which constitutes the blue chips that companies invested their liquidity in, lost 25% while the ZSE Medium Cap Index lost 16% during the period of the suspension, it strongly suggests that the bloodbath on the stock market was largely driven by a run on liquidity.

We also observe that, since the suspension was lifted, blue chip stock prices have steadied. Innscor lost only 2,3% in the week after the suspension, while Delta and Econet recorded negligible losses.

Some investors have voiced a “buy the dip” strategy, which we opine could be misleading. Firstly, the stock market had some counters that were overvalued based on relative valuations, and these have simmered to reflect fair values after the new measures. Such stocks had no strong fundamental case before the suspension, and it remains so even after the suspension was lifted.

Secondly, buying the dip only works if market movements are cyclical and not structural, which is not entirely the case in this instance. Among the president’s measures to contain currency depreciation and inflation was an increase in the capital gains withholding tax from 2% to 4%, much to the detriment of the speculative investor.

This structural change, together with ZSE’s revision of circuit breakers, is likely to change the volatility of the bourse and warrant new patterns in stock prices going forward.

We urge investors to be guided by fundamental analysis, diversify their investments into solid medium cap stocks that limit losses during runs on liquidity, as well as take a more long-term approach in their investments.

  • Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854

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