24 January 2013

Zimbabwe: It's Over to You Gadzikwa!


Zimbabwe Stock Exchange chairperson Eve Gadzikwa might not be vilified in the same way that former chief executive Emmanuel Munyukwi was, presumably because of their gender difference. It is, however, her turn to find out where the positive rally in selected counters is emanating from given the gloomy macro-economic facts and figures for this year.

If market gyrations and humps managed to outlive Mr Munyukwi as we had just realised, we prefer an audit Mr Tafadzwa Chinamo, please sir.

The year opened more than three weeks ago with the release of projections by the Bretton Woods institutions with the developing world's economies expected to grow at quite a higher rate than that of the advanced world, the reason pointing out to the upward rally in commodity prices.

The United States expects a 1,9 percent GDP growth this year, China about 8,8 percent and the emerging economies slightly above 5 percent.

World financial markets have not been disappointing of late with the forex market seeing a rising giant, South Africa, maintaining a strong exchange rate against the greenback.

The debt ceiling debate in the United States, the fiscal disorder in Athens and the re-election of Jacob Zuma at the helm of ANC have all been significant drivers of world markets.

Availability of information is expected to play a very significant role in shaping this economy ahead of some other traditional economic fundamentals.

The equities market in Zimbabwe has suffered the brunt of information asymmetry, which led to a wait-and-see attitude by foreign investors.

It is equally the high degree of information asymmetry, which might have led to the unjustifiable upward rally in selected stocks.

The market woke up to an impressive run with most of the counters breathing life in the middle of "mortuary" conditions, which had been defining the market environment.

The industrial index has significantly risen against a strong rally notably in heavily capitalised stocks.

Econet has risen 16,85 percent since the beginning of the year to open the week at US520c, Innscor put on 12,86 percent to US79c, Delta moved up 15,45 percent to US114,3c. Meikles led the pack with a 40 percent rise to open this week at US21c.

Clothing retail giant Edgars put on 6,25 percent to US8,5c while property giant Old Mutual opened the year at US152c and this week saw it hitting the US180c mark.

It was a rally defying the indigenisation talk. PPC, Meikles, and Old Mutual all rose significantly leaving the indigenisation effect debate at bay since it is traditionally assumed to be one of the major threats to market recovery.

It is certainly a disturbing trend considering there is no fundamental change in terms of market fundamentals.

The bullish run on the ZSE can either be attributed to market manipulations by few players who might have the stamina through size of their deals in an almost dry market.

These are consequences of an oligopolistic structure, as information asymmetry tends to promote such imperfect cycles where share prices move upward without any cause to it, speculative inclusive.

The shunning of the Treasury bills, which were introduced in the second half of 2012 by the private sector, could also have helped to spur the rally.

The unattractive features of the Government paper coupled with waning confidence on Government's ability to honour its obligations, made the Treasury bill an ordinary paper with very few takers.

This could have buttressed the assertion that stock market is the only way to go hence injecting life into stocks.

Other possible arguments for a two-week upward rally on ZSE include but are not limited to a scenario of market realignment, the stock market cycle argument and the easing of the liquidity crunch.

Other factors include changes in the commodity prices and the possibility that stocks are either cheap or very cheap in absolute terms versus market conditions.

The stock market cycle argument relates to our ZSE scenario where the local bourse had reached a depression where the market could easily rise (maximum level of bearishness).

How does one account for an Econet share, which was perched at US445c at the beginning of the year only to open this week at US520c?

Indeed, it is one of the heavily capitalised counters on ZSE but the supposed increase in subscriber base to eight million alongside the confirmed move to acquire a significant stake in TN Bank cannot be the major drivers of the stock.

We foresee a serious readjustment of the share price that will see it closing the month at around US495c.

While Econet claims to have eight million subscribers, it is in our valuations that only 68 percent of the eight million lines are active.

CBZ's stock, which is at US10c, is inconsistent with the nature and size of the institution's balance sheet.

CBZ is the most aggressive lender and its gearing is the highest in the country with an advance book, which exceeds US$100 million. However, the move by Finance Minister Tendai Biti to put a cap on interest rate charges increases the risk profile of its assets.

We also argue and agree that with a greater percentage of their clients being parastatals, the quality of the loan book raises endless questions regarding recovery and service.

It is disheartening and ironic to realise that while Barclays' deposits for the last quarter of 2012 were roughly 50 percent of those of CBZ, its share has been trading at twice the valuation of CBZ's share.

The key to the growth of CBZ's share value might have something to do with its high gearing ratio and the quality of the loan book notably during this dollarised era. However, we believe the stock remains a speculative buy as we trail into 2013.

Delta is another listed company of note on the ZSE. The week opened with its share price at US114,3c.

As much as it still remains undervalued by any measure, the bullish trend it experienced of late might not be sustainable as the exogenous factors remains more threatening.

This is a company which has also regained its lost market share and now commands approximately 90 percent of the beer market from a low of 55 percent. Management anticipates volumes to grow by more than 100 percent on operating margins of between 15 to 20 percent.

Delta consolidates its monopolistic status importing all premier SABMiller brands to the detriment of dubious importers, the counter remains an all-weather friend amid dead silence on the trading floor.

The anticipated strong recovery in volumes for 2013 makes it difficult to discount cash flows in order to value the counter.

The mining counters had not performed to expectations regardless of the positive growth targets envisaged by Minister Biti in his past Budget statements.

The commodities are expected to drive the developing economies forward as the rally in prices persist at a very significant rate.

In 2011, the mining sector was expected to grow by at least 30 percent on the back of exchange control deregulation that allows exporters to retain 100 percent of their revenue as well as the adoption of market-based policies that allows miners to trade their special gem freely in the open market.

The expected retreat of the greenback on the foreign exchange market is expected to drive the prices of diamonds, platinum and gold upwards this year.

Political uncertainty somehow eased after the principals agreed on sticky issues in the draft constitution, increasing the possibility of a constitutional referendum and a plebiscite being held this year.

Of the 76 listed counters, the fact that only eight deserve special analysis depict the state of decay on the ZSE where a high number of listed counters are literally "dead".

Overall, the market value as signified by market capitalisation is not expected to grow significantly this year and we expect the bouts of market rallies to occasionally make way for extended periods of market decline.

Thank you and may the Almighty bless you.

Christopher Takunda Mugaga, Head of Research Econometer Global Capital.

Copyright © 2013 The Herald. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 2,000 reports a day from more than 130 news organizations and over 200 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.