Why you should invest on the ZSE now

Zimbabwe’s economy has been using a multicurrency system in which the South African Rand and the United States dollar are key currencies since 2009. The Zimbabwe stock exchange (ZSE) which resumed trading after a lengthy break in 2008, with investors taking a wait and see attitude has experienced some mixed fortunes in 2011. In the First and Second quarter we saw the market gaining nearly 10% before it slumped in the third quarter as foreign investors took flight in a market in which local investors are shy.

Company valuations are at levels that we haven’t seen in a long time. Price/Earnings ratios are mostly below 8 times for most of the profitable Blue Chip counters, in an economy expected to register an economic growth rate of over 7.5%. It makes very little sense to me because in most companies revenues are growing by a factor 4-5 times the expected GDP growth rate, whilst bottom line is up by a factor of 2-3 times. What more do investors want?

Volume growth in most of these companies is even more impressive. Ask Innscor, Delta, Econet, National foods, OK, Zimplow, DZL, Hippo just to mention a few. They will tell you that they are experiencing good volume growth upwards of 25%. In stark contrast the ZSE as measured by the industrial index has dropped from 164 points in August 2011 to 143 points In November 2011. Money Supply (M3) grew by 44% in August, compared to 51% in July and is thought to have dropped further in September and October, which supports the theory that the country is going through a liquidity crunch that has reduced inflows into the ZSE. Meanwhile on the Money market investment rates have been firm of late, confirming that the economy is going through a liquidity crunch. 30-90 day investments are attracting as much as 17% compared to 13% in the first quarter of 2011.

In the real economy we continue to grow and we have seen consumption increasing prompting companies to increase production to satisfy the increased demand of goods and services. It is an interesting story that has been developing in Zimbabwe, but one that has largely been ignored by the local investors, most of who have no exposure on the ZSE as we speak having sold out of the market when we dollarized. What is happening to the market is new to most of the local investors who are baffled by the fact that most stock prices are still to record positive gains in 2011.

Whilst I do not have firm statistics on how much is invested in our financial institutions by local investors especially individuals, it is safe to assume that of the $3billion local cash in our banking system more than 50% of this is in term deposits ranging from 7days to 182 days. The ZSE has a market capitalisation of just over $4bn, most of which is accounted for by Pensions Funds and Foreign Funds. As at the end of August according to RBZ stats, 39% of the country deposits were in Savings, Short term and Long term deposits.

Inflation climbed to 4.3% in October from 3.5% in September following the increase in electricity tariffs. This is really worrying for our economy as we are largely without tools to control inflation. Our inflation will remain very much cost-push inflation if not imported. The ZESA tariff increase like most price increases that the country will witness going foward are largely unavoidable and part of the country’s “unfinished business” of the last 2 decades.

Ask any Zimbabwean what inflation rate will make them feel comfortable and they will tell you that it is any rate that is not rising! No investor wants to experience inflation again. In my own opinion the fact that inflation is seen closing 2011 above 5.5% will very much trigger memories of the days of hyperinflation and could have a destabilising effect on an already wobbly situation. As the minister of Finance prepares his budget statement I have no doubt that his thoughts are being consumed by this very fact. Failure to tame inflation will steer our economy onto a path we all loath.

The bearish trend on the stock market is largely because investors are not confident that there are enough consistent policies that are in place that will not see a repeat of the lost decade. Even though the economy is growing and companies are continuing to post very good results, investors have decided to keep a cool head and will only jump back into the stock market when they are sure that their money is SAFE.

Money market feels very safe right now because no bank has been shut. If there are signs of problem in our banking sector that too could soon become a victim of investors’ fear of the unknown. Contrarian investors and I am encouraging you to be one today are busy accumulating ZSE shares because the underlying story in Zimbabwe remains good. Output in the Mining and Agricultural sector output is on the rise, boosting the country export earnings. It is a story worth buying into and one that is well supported by what is happening on the ground

Is this the time to speculate on the ZSE? NO!! Is this the time to invest on the ZSE? YES. There is a difference between investing and speculating. Much of what we were doing in the hyperinflation years was speculating. We bought low and sold when the stock had doubled, tripled, quadrupled. It was a no brainer because inflation was at work. Today one must carefully pick their stocks based on a number of factors I hope to delve in the near future. If you are looking to lock away some money for the next 6-12 months here are my picks.

1. Old Mutual

Apart from investing in a company that is not directly exposed to Zimbabwe, you are investing in a company that has probably seen the worst in the markets in which it is invested. There is therefore very little downside risk. Infact the company has broken its support level in the last 12 months of $1.26. RSI is slightly below 30 an indication the company is due for some rerating. Also love the fact that the company pays out a dividend.

2. PPC

From the 13th of September 2011 PPC started dropping. It has dropped from $3.25 to $2.20. RSI at 26 is below 30 and is signalling a trend reversal. The company is expecting half of its revenue to come from the rest of Africa by 2016. Construction in Africa is a growth area. The company has also been a consistent dividend payer.

3. Innscor

At 54cents Innscor is trading on a P/E of 11 times. For a company that is rapidly expanding and benefiting from the use of multicurrency I think this good entry point if one is looking for good volume. The share price is looking very soft. It did drop to 51cents before it recovered to 54 cents a couple of days ago. RSI at 27 is very much indicating a trend reversal so

Different sides of the same coin

They are both listed on the ZSE and are what we call Blue chip counters. No long-term portfolio would be complete without them. Both companies have invested large sums of money in their businesses since dollarization in 2009 and have started to reap the benefits of these investments. In the year to March 2011 both sold nearly $500m worth of products and are very profitable. They both paid a dividend and contributed over $50m in various taxes. In fact I can go on and on about these two companies and at end of the day the only thing different about them is the fact that one is up 21.2% so far this year, while the other is down 12.5%.

If you are an investor on the ZSE, you probably know by now that the two companies I am writing about are Delta and Econet In the last two weeks both companies held Annual General meetings, where trading updates were given shedding more light on what is happening in the respective operations. I attended both and in this blog I will try and give you my take on the two companies and perhaps help you understand why they are so similar but are performing differently on the local bourse. Remember these are just my personal thoughts and not be treated as gospel truth!

As a Long term investor on the ZSE I have been following both companies and watching them release results one after the other. I have seen them struggle during hyperinflation. I have been fortunate to see then fighting back and performing well in this stable environment. At Econet's AGM no numbers were given regarding the company performance but management was very positive and unperturbed about the flurry of activity in the Telecommunications sector, where competition is red hot! for more on developments in the country's technology industry i recommend this link "http://www.techzim.co.zw"

Let us leave the numbers to do the talking for a while:

See the charts below for a dramatic showing of their share price performance since February 2009.

This chart tells a very positive story. The growth in Delta’s price has been a gradual one when compared to Econet’s. Much of Econet’s growth was experienced soon after dollarization when the share price touched 520 cents before settling down in a 450-480 range. The break below 420 is long overdue when one looks at how many investors have been sitting on high profits. In fact Econet rose in one single step to above 420 and has never dropped below this over the last 18 months to be exact!

This is a very depressing chart! All indications point to Econet stopping at 400. Anything lower than that would really be a big surprise, almost unthinkable! But hey anything is possible in our market. For now though Econet has bounced back from 420 and opened the week at 430, will it hold? time will tell.

Counters to watch with potential to recover by the end of the third quarter are
Old Mutual, Riozim, Star Africa, PPC. The following counters are looking overbought Edgars, Truworths, and Fidelity.

Is the Stock Market A barometer of Economic Activity

Meeting with a few analyst friends of mine last week spurred me to take time to renew my BLOG! Thanks Guys you know who you are! Many will wonder whether i am still in the thick of things, i.e following the ZSE and the Zimbabwean economy in general. I am very much involved and over the last 6 or so months since i last said something about the ZSE, a lot has happened. That makes it easier for me to jot down a few notes of what i think is happening and were i see things going.

Just like the happenings on the political front, which as we all know have a tendency of overshadowing everything else in the economy, Investors have completely ignored what is happening on the stock Market. The reporting season ended two months ago without incident despite the fact that we saw some brilliant numbers from all blue chip counters including some middle-tier stocks.

I will probably not need to look at the counters that posted results, because as i write we are already expecting a number of results to start filtering through the market. Believe me they always do! Forget the talk about insider trading being punishable. Year in Year out results leak and this is seen via unexplainable price movements. A price that has been on the up suddenly drops and as it drops no-one wants to buy it yet a number were willing to buy it at higher prices and so on.

Being a fan of Technical analysis, I see a number of trends being recycled and this year something is a bit different. There are very few signs of a bullish trend developing for both industrial and mining counters. Every Mid-July/through to end of August the market turns. WHY? Heavy weights post good results and in many cases give a dividend. The Minister of Finance, sometimes the Governor of the Reserve bank announce a policy shift that spurs the market. There is always something! That something appears to be overshadowed presently by something many analysts are too familiar with at the moment! LIQUIDITY CHALLENGES.

Yes! the placement of Renaissance Merchant Bank under curatorship last month after a hole yet to be properly quantified, but believed to be above $18m has done some damage to confidence in the markets. Money market rates that had found a level around 10% have risen sharply to between 15-20% on money market fixtures of between 14 to 90 days. Although it is thought the RMB problem is contained, investors are not taking any chances. It seems that many have withdrawn their money from banks and structures and are either keeping it under the pillow or busy "stashing" it outside the country. Who knows really what is going on. Whatever it is that has led to rates spiking, it must be reversed by restoring confidence back into the banking system and the economy as a whole.

You see what has also been happening now that there is a liquidity crunch is banks and people who are owed money are now trying to recover their money by realising the security they had been given to secure the loans. This explains to a degree the fact that we have seen a number of counters becoming oversold. Old Mutual ($1.49), RioZim ($1.10), Econet ($4.72) CBZ (16c), Hippo ($1.15) Seedco ($1.22). Meikles (32c) If you look up results for these companies save for RIOZIM and Meikles you will see some good numbers.

Counters that have been on an impressive run are DZLH (peaked at 30c now 29c), TPH now(15c), Turnall (14.5c, BancABC (peaked at 70c now 65c)