‘Falling ZSE stocks, a buying opportunity’

EQUITIES on the Zimbabwe Stock Exchange (ZSE) have dropped 68 percent on a year-todate basis in US dollar terms.

However, this presents buying opportunities, particularly in firms generating foreign currency.

Government has from the second quarter of the year introduced a raft of measures to arrest the runaway inflation and speculative tendencies harming the economy.

A combination of restricted lending and higher interest rates compelled investors to unwind positions and unlock funds from the stock market.

The result has been a significant sell-off on the market resulting in an undervaluation of counters – with the traditional blue chip firms like Delta, Econet, Innscor and Hippo valued at less than a US$1.

On average, Delta would be pegged at US28 cents while Econet, Innscor and Hippo would trade at US16 cents, US33 cents and 30 cents respectively using the average parallel market rate of $800. The declines also put pressure on returns for institutional investors such as pension funds who rely on equities as a safe investment option and also make up the bigger chunk of local investors. According to the Insurance and Pensions Commission (IPEC) figures, 50,49 percent of the $488,12 billion pension funds assets were in quoted equities as of the second quarter of 2022.Market watchers opine that while the measures introduced have triggered a liquidity crunch in the equities market, stock prices have dropped significantly in real terms with the market looking “cheap.” In their equity strategy note, Morgan and Co upgraded the ZSE to a buy recommendation.

“One fundamental observation is that prices have declined significantly in real terms and the market is looking cheap.

“The recent sell-off on the ZSE has resulted in apparent undervaluation of traditional blue chips like Delta, Econet, Innscor, Hippo and Meikles while there have been no fundamental changes to business models.

“Additionally, the financial services sector remains undervalued. Buy the ZSE,” said Morgan and Co.Last month the Government also introduced gold coins as an alternative investment option which has also excited the market with investors opting for the gold coins ahead of the equities market.

Said Morgan and Co: “The introduction of gold coins, therefore, has triggered a massive sell-off on the ZSE as institutional investors are switching to an alternative asset class. As a result, the stock market has largely de-rated on weak demand because of tight liquidity on the market.”

But the challenge is not unique to ZSE alone but prevalent across the region with Ghana Stock Exchange falling 37 percent in US dollar terms, according to African-markets.com.

Stock markets in Egypt, Morocco, Kenya and Uganda are among the top laggards on a year-to-date basis after falling 31 percent, 18 percent, 16 percent and 12 percent in that order in US dollar terms.

However, Lusaka Stock Exchange and Nigeria Stock Exchange have been the top performers rising 18 percent and 14 percent respectively.

IH Securities says while the policy measures introduced cool the market and present buying opportunities, general economic stability will restore confidence in the market and in the economy.

“Our view on macro stability will remain guided by the central bank’s ability to manage inflation and exchange rate stability. A stable exchange rate encourages business confidence and therefore investment, thereby supporting economic growth,” said IH Securities.