12 October 2018

Zimbabwe: Rush to Offload Cash Triggers Stocks Rally

Photo: allafrica.com
Emmerson Mnangagwa (left) and Nelson Chamisa.

Stocks rallied this week as investors rushed to get rid of cash and electronic balances and took positions in equities after the accelerated devaluation of the local currency triggered by government's announcement last week that the local unit no longer had the same value as the United States dollar.

Equities are generally believed to be a safe hedge against inflation and allow investors to buy a chunk of a company's underlying assets.

Finance minister Mthuli Ncube's announcement last week that corporates and individuals should open new foreign currency accounts was construed to mean government no longer recognised bond notes and Real Times Gross Settlements as equal to the US dollars and triggered a wave of price increases.

Zimbabwe adopted the use of US dollars in 2009 after hyperinflation decimated the value of the Zimbabwe dollar.

Investors holding cash splashed on stocks with a total US$9,5 million being spent on Tuesday, pushing the market to a historic market valuation of US$16,7 billion.

Stocks surged 13,23% on Tuesday buoyed by gains in big caps.

Prior to the announcement, investors had been cautious to buy above seemingly high valuation metrics save for a few selected counters.

Market analysis shows that investors had been buying in companies with either good fundamentals or those perceived to be trading below their underlying values.

Only a handful of counters such as Innscor Africa linked companies were trading at premiums to their book values and seemingly high price-to-earnings (P/E) ratios.

As at August 31, Axia was trading at a premium to its book value of 3,76 and a P/E ratio of 14,84. Essentially, a P/E of 14,84 means an investor had to pay US$14,84 for a dollar in Axia earnings. Natfoods, another Innscor-owned business, had a P/B ratio of 3,82 and a P/E multiple of 22,47. Innscor itself had a P/B ratio of 3,89 and a P/E of 28,17. Econet, one of the top companies on the ZSE, has a P/B ratio of 4,24 and a P/E of 21,48. Delta, the largest company on the ZSE by market value, had a P/B ratio of 5,58 and a P/E of 30,50 in the period under review.

Property stocks were trading at considerable discounts to their book values in the same period.

Analysts are seen avoiding fundamentals -- the analysis of financial statements and use of valuation, gearing and other metrics -- to make an investment decision going forward as the battle to preserve value continues.

At the peak of last year's bull run, counters such as BAT Zimbabwe were trading at P/B premium of over 50,13 and a P/E of 67,22. This was above its industry and sector peers in the same period in the region.

Should the central bank not intervene, valuation metrics will reach dazzling levels.

Already, Mthuli Ncube has tried to calm markets and inspire confidence in the market by announcing that the local currency still has the same value to the US dollar. He also added that the Afreximbank had agreed to some guarantees to support the value of the US dollar.

The market remains suspicious of the existence of this guarantee after the central bank failed to prove the existence of a facility it used to introduce bond notes.

Old Mutual, a fungible stock, added another $1,46 to close at $8,84 in response to the currency fluctuation as investors moved to preserve value.

By Wednesday, investor fears were more pronounced with a total US$20 million being spent on shares.

The All Share index added another 16,14% to close at 176,52 points.

By Wednesday, The ZSE had reached an all-time high valuation of $19,5 billion valuation. Other companies and individuals with cash also piled into the US dollar to preserve value amid uncertainty.

The rate for electronic balances was as high as US$1:3,50 or a discount of 350% to the US unit at day end Wednesday.

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