More pain ahead for ZSE

Legend has it that Joseph P. Kennedy, father to US President John F Kennedy, sold all his equity holdings just before the infamous 1929 US stock market crash because he overheard shoeshine boys and other market novices talking stocks. From that day, this has become a yardstick of an overbought market.

His colleague, Jessie Livermore, however went a notch further and would short the market to a tidy $100 million profit, in the process earning himself the label of having ‘sold America’. This is stuff of legend, it does capture anybody’s imagination. It’s a pity we do not document such in Zimbabwe, but boy did we have our own gunslingers as the ZSE rallied to unprecedented heights between 2006 and 2008!

I was there and whenever people bring up stories of US stock markets in the 1920s, it invokes some sense of nostalgia in some of us. In those infamous years, you could get a stock tip over lunch at backyard eateries of Harare. Everyone had an account with a stockbroker and an active one for that matter. The trade was a no brainer. Prices were simply going up. Equities were the only sensible asset still trading in Zim dollars and a feasible insulation against the crumpling currency. The central bank, on the other hand, was doing its bit, overworking the printing press and dolling out cash in trillion dollar denominations. Those were our years of excess, but unlike the Americans, we actually had a happy ending. Dollarization provided a soft landing and most people managed to cash out their holdings for proper US dollars having acquired them with a currency facing imminent demise. Deals don’t come any sweeter than that.

Things have, however, changed.  The situation is now inverted and all we have known is a declining market since July 2013. The industrial index has gradually climbed down from its post dollarization peak – just north of 230 points and is threatening to break below the 100 points base by end of January. All the gains of dollarization have evaporated. We are back to where we started in 2009.  What we have sought and failed to find is the market bottom. There is just no stopping the slide. Whoever will correctly call the bottom will surely be handsomely rewarded, but in my view 2016 is unlikely to be the year that the ZSE launches its comeback. This losing streak is likely to persist with prices staying lower much longer, even beyond 2016. This of course is on condition that nothing major happens to significantly reduce what the world has come to know as the ‘Zimbabwe risk’.  Those of my calling are fond of creating an escape route through vexing terminology, so please just take that as is – it’s my escape route for when I am off the mark.

Why do I see more weakness? Firstly it has to do with the complexion of world growth and its influence in the movement of capital. Consensus view is that global GDP growth will grind higher to 3.5% from 3.2% in 2015 driven in the main by recovery from crisis countries which are essentially the ravaged emerging markets as well as Europe and Japan. The latter two will be huge capital magnets just as the USA has been in 2015. This will sap capital from emerging and frontier markets inducing volatility and general decline in share prices. We have already seen this playing out in China and Nigeria where share prices have been on a free fall prompting authorities to enact circuit breakers to try and preserve value. Zimbabwe and other peripheral markets do rely on spill offs from allocations to these markets and when they start coughing the ZSE catches full blown pneumonia. Take away foreign investors who account for more than 50% of the ZSE activity, prices have only one way to go, which is down.

The second reason has to do with the African growth narrative. The doubters’ corner is gaining a voice and proof on the ground gives credence to their school of thought. Africa has registered strong growth rates owing largely to its emergence from a low base. Drivers have been proceeds from the extractive sector and access to international debt markets as sovereigns exploited their new found borrowing capacity following debt forgiveness. Infrastructure development has received the bulk of the cash, but this growth story lacks one essential pillar to propel it further and make it durable which is industrialization. Naysayers point this out as the prime reason why the consumer story has taken center stage. Africa is just but a market for goods produced elsewhere, she generally cannot competitively produce for her own billion people. Zimbabwe epitomizes the reasons buoying the doubters’ story. De-industrialization, electricity shortages, disintegrating road & rail infrastructure and generally weak administrative institutions. These can all connive to repel investors and Zimbabwe has an oversupply of this, hence my view that our country is likely to be found in the group of markets to avoid owing to a concentration of these negatives.

At a national level, Zimbabwe’s peculiar challenges are well documented and they are all summed up in stunted economic growth. According to the World Bank, Zimbabwe GDP is expected to grow by 2.5% in 2016, up from 1% in 2015, but well below 4.6% for the Sub-Saharan Africa region. This actually looks ambitious given the challenges that the country faces. Zimbabwe, like its southern Africa counterparts, faces a crippling drought and requires cash to import food at a time that treasury revenue collection has been weighed down by the crash in commodity prices. To add to that, policy formulation, implementation as well as consistency has not improved enough to be an enabler for economic growth.

The impact is on two fronts. Firstly, there is a very strong positive correlation between the industrial index and growth in GDP as can be shown by the almost identical movement in their graphs since dollarization. Without strong economic growth, is difficult to envisage a strong rebound. While the forecast for 2016 is higher, it is simply not high enough to exert enough influence for a turnaround. Secondly, Zimbabwe is growing slower than its peers hence its fails the first huddle when investors screen investment destinations if it is stacked against its African peers. It is thus just difficult to see prices improving this year.

Lastly, at company levels, earnings will not be good enough to support recovering prices. What we have witnessed last year is declining revenues against production costs that remain stuck up. The result has of course been thinning operating margins. For some companies this is made worse by unsustainable debt servicing bills which translates to either declining profitability or expanding loss positions. To add to that almost all industries in Zimbabwe are at the mercy of cheap South African imports that are being made competitive by the depreciating Rand. Utilisation capacity of below 35% in the manufacturing sector reflects this to a large degree.  Retailers are equally struggling to keep pace with markdowns and shrinkage will inevitably affect profitability. It is therefore very difficult to envisage a situation where earnings will improve from the 2015 outturn and this further supports my expectations for lower share prices in 2016.

The bottom will come of course. What goes down must always go up, but for 2016, the ZSE is unlikely to bring any cheers to investors that have endured a two and a half year wait. The good thing though is that this presents good entry points once conditions improve, and as always, trust me to state that I predicted the glad tidings to come.-The Source

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