The Zimbabwe Stock Exchange closed the year 2019 in the positive territory but still left investors counting their losses in US dollar terms.
Expectations are that year 2020 will be better as some of the value erosion pressures such as inflation and exchange rate depreciation will at best stabilise or at least not be as elevated as last year.
By the close of trading in 2019, the ZSE’s main industrials index had gained 57,32 percent while the mining index had put on 39,06 percent in Zimbabwean dollar terms. The gains will, however, count for little for ZSE long-term investors who over the past decade have been investing US dollars onto the market but will only be able to dispose them in local Zimbabwean dollars whose value depreciated by approximately 90 percent in 2019 alone.
Since 2009, ZSE stocks were traded in US dollars starting at a market cap of US$1,3 billion in 2009 up to a market capitalisation of US$27 billion in June 2019, the month the bubble was burst following Government’s decision to outlaw use of foreign currency for most local transactions including trading of stocks.
The decision meant stocks that were supposedly valued in US dollars, all along, were now valued in Zimbabwean dollars at an exchange rate of 1:1.
Although the stocks were to record further gains and close the year at $29,7 billion the gains did not mean much as the exchange rate continued to weaken with the real value tumbling to US$1,6 billion at the close of 2019.
Pension funds, with 40 percent of their assets in stocks, according to regulator IPEC, are likely to be the most affected in terms of asset valuations.
Long term foreign investors who bought shares prior to June 2019, will also be counting their losses following the sweeping currency changes.
Market watchers say Treasury’s decision to convert stock prices from US dollars to a local currency at 1:1 left many investors counting losses. For example, a foreign investor who invested US$10 000 before the end of 2018 now had the investment reduced to US$596 at the 2019 closing exchange rate even if the nominal price had not changed.
Turnover more than doubled
Meanwhile, a total $2 billion worth of shares changed hands in 2019, signalling increased market liquidity in local currency. This might be a reflection of the inflationary environment that saw cashflows for investors, such as pension funds, increase significantly in local dollar terms.
In 2019 pension funds and insurance players reviewed their premiums upwards and some of the funds were channelled towards buying stocks. The jump in turnover can also be attributed to a shift in asset allocation towards stocks, which are considered less risk than money market investments.
Where to in 2020
While sellers are counting their losses given the exchange losses recorded at the change of currency in 2019, buyers have a huge potential to smile all the way to the bank in the medium to long term. Investors will have to look beyond the weak micro-economic fundamentals, such as falling volumes and profits, that characterise local companies at the moment.
Many companies are characterised by negative cash flows, low or negative return on assets, high gearing, weak balance sheets among other ills. Trading updates released by most ZSE listed stocks indicated declining volumes and profits.
Notwithstanding all the negatives above, there are a few bright spots on the ZSE. There are quality stocks listed on the ZSE that are trading at discounted valuations. At 2019 closing levels, companies with positive cashflows, that are well capitalised, well managed and with sustainable business models look undervalued and might have a quick positive turnaround when the economy turns for the better.