BLUE chips continue to attract investors on the Zimbabwe Stock Exchange (ZSE) (Visit http://www.zse.co.zw for live trades). Why? They are strong companies with a proven track record. Who can doubt the strength of companies like Econet, Delta, Old Mutual, PPC, Innscor, RIO to mention a few. By the way few companies make the list of not more than 15 blue chips on the ZSE. More than 80% of the money being invested on the ZSE is going to the blue chips.
Tried and tested business models, proven track records, tangible assets and strong cash flows are some of the attributes of these companies. It is not difficult to spot them. They are large and always post big numbers. Investors don’t like to fumble when searching for value. They know were the value is and are consistently investing in these companies. Keeping an eye on them myself! That is a good recipe to make money in the long-term. You don’t lose sleep over these companies. Given the stable economic environment there is very little space to speculate. Gone are the days when stock prices used to rise by more than 100% a day.
These days if you get a rise of 3-10% per month, you have done very well. Be grateful! Pick your stocks wisely. Due to the uncertainty that still prevails regarding the country future very few investors are willing to take a dip into the unknown by buying middle-tier and small companies. These companies often do not have strong anchor shareholders and are the ones in most need of recapitalization. At the end of the day it becomes a vicious circle, where their failure to mobilize capital leads to them not being attractive on the market. This in turn makes investors shy away from them and so on.
Expect a few exceptions. Some of these small cap counters will outperform the blue chips. The important thing is to try and take positions in some of these companies because in time and as the economic environment continues to improve these companies could easily become blue chips too.
As pointed out last week, the biggest challenge facing listed companies is access to affordable working capital and in some extreme cases lack of money to buy new equipment. Zimbabwe’s economy was in a recession for the last decade and during that time very little was re-invested. On the other hand investors face an even greater challenge of trying to decipher what is happening in these companies. Over the years we had become accustomed to hearing only good news. The harsh realities are starting to sink in now. As investors we need to recapitalize our companies in order to give them a chance in this stable environment where competition is becoming stiff with each day that passes.
Below I have attempted to identify some factors that I think deserve investor focus in 2010, in order to decide what to invest in.
Positives
1. The economy has stabilized (the country has witnessed rapid deflation) this has removed speculative activity in the economy and is encouraging investment into productive sectors
2. Financial liberalization is complete (investors are free to move capital in and out of the country) this has seen net inflows of money
3. Government has not intervened/reversed policies in the economy since adopting multiple currencies (predictable policies make planning easier)
4. Investors are flocking to Zimbabwe in search of opportunities (most investment has been in the mining and telecommunication sectors)
5. For once everyone is speaking positively about Zimbabwe (forget the niggling issues! Who doesn’t have them anyway? They will pass. We all want that to happen tomorrow don’t we?)
6. Money is now real (you can afford to hold cash and still come out right, no need to take unnecessary risks to preserve value)
Negatives
1. Political differences are costing the economy. (investors want certainty and stability)
2. Liquidity remains a challenge in the economy. This has driven up the cost of borrowing (as much as 38% per annum for unsecured lending)
3. There is very little saving in the economy. (This limits the amount of money available to borrowers)
4. The agricultural season is looking uncertain as reports of crop fatigue continue to pour in from the country’s main productive provinces. (this could mean that we will need to import more food, straining an already tight budget)
5. Crisis of expectations is looming large in the area of wages and salaries (threats of strikes etc)
When buying remember not to buy at the top! Don’t say I didn’t warn you. Always buy when the price is low and sell when it is high. It pays in the end to watch price trends overtime before you enter or exit a position. I wish it was that simple!
