eBusiness Weekly
Taking Stock Kudzanai Sharara
Two weeks into the year I posted, through my twitter handle, that 2020 could be the year for stock market investments where a recovery from last year’s pain is a strong possibility.
“In 2020, if you earn Zimbabwe dollars, getting into the (stock) market might be a very good idea. I see the (stock) market beating inflation,” reads my tweet which I have since pinned for easy access by year end.
|
ZSE Indices as at 29 January 2020 |
YTD Performance (%) |
|
ZSE All Share Index |
+21,49% |
|
ZSE Top 10 Index |
+24,90% |
|
ZSE Top 15 Index |
+22,72% |
|
Medium Cap Index |
+13,40% |
|
Small Cap Index |
+26,94 |
I used the ZSE performance up to the 29th of January to say those who had bought stocks at the end of 2019 or on the year’s first day of trading were in the money as the performance was better than my forecast inflation for January 2020 of approximately 15 percent. So at the time of my forecast the ZSE All Share Index had already clocked 21,49 percent, which is a return above the latest month-on-month inflation of 16,55 for December 2019.
For those who would want to see those gains in real terms, as at that date, the 29th of January 2020, the ZSE market capitalisation had already gained US$300 million using the interbank rate of 17,31.
Coming back to my twitter post, I had said local investors with some cash to spare or rather looking for an investment home should seriously consider buying stocks. As expected some people did not agree with me including former Finance Minister Tendai Biti who said telling anyone to consider stocks as an investment option is “dangerous advice”.
The tweet by Honourable Biti, who is also chairperson of the National Assembly’s Public Accounts Committee, reads:
“Very dangerous advice. Apart from real estate and investment in hard currency any other form of investment disrespects fundamentals. This is no place for business.”
He raises very good points because in 2019 the ZSE was home to value erosion. Company valuations were not only decimated by Government’s decision to switch from a multi-currency system to exclusive use of Zimbabwe dollars for all assets and liabilities, but also by ravaging inflation which reached and estimated 521 percent year-on-year at the end of 2019. The currency switch meant share prices or equity assets that were US dollar denominated were now denominated in Zimbabwean dollars soon after promulgation Statutory Instrument 33 of 2019 which reads:
“. . . For accounting and other purposes, all assets and liabilities that were, immediately before the effective date, valued and expressed in United States dollars (other than assets and liabilities referred to in section 44C(2) of the principal Act) shall on and after the effective date be deemed to be values in RTGS dollars at a rate of one-to-one to the United States dollar.”
SI 33 of 2019 was also supported by SI 142 of 2019 which reads:
“Subject to section 3, with effect from the 24th June, 2019, the British pound, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe.”
These two statutory instrument effectively meant all stocks had now assumed local dollar balances. For example, as at 21 June 2019, the last trading day before SI 142, the ZSE was valued at US$29,5 billion, but was now valued at ZWL$29,5 billion or US$4, 7 billion by just one decision. By the end of the 2019, the ZSE was now valued at US$1,8 billion at interbank rate, as the local dollar had continued to weaken.
Away from the currency issue, rampant inflation also meant the gains that the market made in 2019 of an average +57,33 percent for the ZSE All Share Index, were negative when adjusted for inflation which stood at an estimated 521 percent by close of 2019. So just like Biti, many other stock market investors would not touch equity investments even with a barge pole because of their experience in 2019.
The question, however, is what other options are there for those who have cash to invest. Insurance companies and pension funds, for example, receive premiums and contributions every month and would have to invest that money not only to maintain its value but also earn some income. Biti said “apart from real estate and investment in hard currency any other form of investment disrespects fundamentals.”
But are these assets, even if they preserve value, offering positive returns? When one considers property investment, it’s a very expensive exercise to put up or purchase a building using local dollars as some of the materials will have to be imported. Players in the property market will also tell you that the rental yields and occupancy levels are very subdued at the moment and value might still be lost.
The talk of investing in hard currency, where one can at least preserve value, though valid, is not easy as forex not readily available in formal channels where law abiding institutions and individuals can access it.
So for me, 2020 could be the year for stocks and January did not disappoint as the stock market gained 33 percent in US$ terms. At the close of 2019 the ZSE overall market capitalisation was roughly US$1,8 billion at interbank rate but closed January 2020 valued at US$2,5 billion.
Using parallel market rates, at close of 2019 the ZSE was US$1,17 billion but as of Friday it was now worth US$1,7 billion, that’s roughly US$600 million gained.
A quote by one of the greatest stock market investors Warren Buffet reads:
“A climate of fear is your friend when investing; a euphoric world is your enemy.”
There are obviously risks to the stock market’s performance in 2020 and the main ones are inflation and the exchange rate. With regards to inflation, the equities market is usually considered as a hedge and share prices should be able to stay above inflation by end of year.
The other risk is, however, that of currency weakness. The strength and direction of the Zimbabwe dollar against the US dollar will determine whether the stock market will have a positive return or a negative one by the end of year. Either way, Warren Buffet says:
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
