‘ZSE a hedge against volatility’

INVESTORS are pouring money onto the equities market — the Zimbabwe Stock Exchange (ZSE) — to hedge against any possible currency risk and inflationary pressures, market watchers have said.

As of last week, the USD was trading at $105 on the interbank market while the exchange rate on the illegal parallel market ranged from $185 to $200.

Coupled with excess liquidity on the market, punters have for years used the equities market as a safe investment haven and hedge against volatility.

During the period to October 2021 or end of the third quarter, the market maintained a bull run sustained by blue chips’ strong performance, although small caps also registered strong performance during the first half of the year.

This saw the market breach the $1 trillion mark on strong demand in big-cap counters.

“While small caps led the market in the first half of the year, blue chips have sustained the current market trajectory with strong performances as new money finds itself on the bourse driving demand,” said stockbrokers IH Securities in their YTD Review-Equity Strategy.

“The Zimbabwe Stock Exchange has been displaying considerable market breadth with gains registered across the board. Prices remain sticky downwards with funds seemingly being diverted into the market as a hedging strategy against an increasingly volatile parallel market rate,” said IH.

However, IH warned investors to be cautious on their choice of counters as “majority of stocks are punching above their earnings capacity”.

They see consumer stocks as a preferred option as they have been experiencing real volume growth as seen from earnings reports released for both half-year and full-year performances.

These are also expected to maintain growth in their trading volumes as consumer spending improves on the back of increased economic activity coupled with relaxation of lockdown conditions during the last quarter of the year.

“While a knee-jerk reaction would be to invest into any available stock as an alternative to cash, we are of the view that most counters are now trading at a premium to fair value, creating downside risk of a bubble.

“As such, we are leaning towards companies that are fundamentally sound and have a culture of management execution that prioritises long-term shareholder value creation.”

Opportunities lie in companies like Simbisa, Innscor, Econet, OK Zimbabwe, and Delta which have become bigger through acquisitions.

These have shown resilient performance despite a challenging environment due to the effects of the Covid-19 pandemic.

But as the economic activity continues to improve with positive economic projects also in place, consumer-facing companies are seen performing well as disposable incomes also increase.

Said IH: “It is our view that while Zimbabwe retains its structural challenges, on a relative basis the consumer is experiencing a recovery in spend albeit off a low base and on a disproportionate basis. This spend is clearly reflected in volumes.”

Elsewhere, the USD denominated exchange — the Victoria Falls Stock Exchange (VFEX) provides a strong case for investors to channel their monies there.

The Government introduced several incentives to lure investors and listings, for instance, capital raised by a listed company on the exchange may be held in an approved local or offshore account with an internationally recognised banking institution, tax incentives for shareholders of shares listed — at 5 percent dividend withholding tax (foreign investors only) and exemption from capital gains withholding tax while exporters retain 100 percent of their incremental export proceeds.

Since it opened its doors in October last year, the VFEX now has three listings, Seed Co International, Padenga and Caledonia which listed last week. Nickel producer, Bindura is also expected to list on the exchange by year-end.