Macro-volatility on ZSE will remain
December 2021 capped a very volatile year for Zimbabwe in the economic sense. The economy continued to wobble despite bouts of comebacks. The economic vagaries which were present throughout 2021, were a carryover effect of the prior year and the one before it. Some have chosen to tag the volatility as a new normal given the high level of recurrence.
The biggest takeaway from the year was that the economy is far from stabilisation. From the beginning of the year the economy faced challenges around forex availability, inflation and shortages of some goods and services. These realities dwindled the positives around an economic rebound which the government projected to be in the region of 7%.
As we move into 2022, we look at some of the prospects and headwinds relating to investments on the local market. The ZSE remains the dominant asset class attracting a significant portion of investments compared to the money market and other alternative investment classes. This is because in an inflationary environment, financial values go up making people paper rich as liquidity increases and drives economic participants to seek avenues for utilisation of the funds. It is also so because monetary investments returns are diminished with the rise in inflation and the gradual monetisation of debt.
For a summary of the stock market performance, 2021 saw the ZSE mainstream index soar by 311% in nominal terms and over 200% in real terms. The performance made the ZSE the best performing in the region and sub-Saharan Africa as a whole in real terms. The performance is a carryover from the 2020 period over which the ZSE outperformed all the regional exchanges to emerge as the top performer. The question getting into 2022 is on whether this performance can be replicated and what positions investors would need to take to yield maximum returns in the local market.
The ZSE has generally had a history of strong volatility and while this characteristic is inherent in most emerging markets, the case of Zimbabwe is quite an outlier. The performance of the stock market has been closely linked to the broader economy and looking at data over a 10-year scale, it is clear that the bourse stagnated in periods of low economic growth and surged in periods of high economic growth. This phenomenon holds largely true for most economies. The logic behind this move is that companies which are listed on the stock market benefit more when the economy is growing.
Consumption which is reflected through demand naturally rises as the economic cake grows. It is expected that companies' earnings, which form the basis for valuations, also respond as investors anticipate higher outcomes on the underlying performances of the companies they are invested in.
However, it is not only economic growth which is a key factor in driving the stock market, other variables may have a higher short-term effect and either push or pull the stock exchange as a reaction. These factors include inflation, general asset prices and some sentimental factors such as the general confidence of the populace. For Zimbabwe, between 2010 and 2013 the stock market exhibited low volatility with annual returns hovering between -4% and +4%. Between 2014 and 2019, the stock market experienced wider volatility with losses of up to -40%.
While the period between 2009 and 2013 was characterised by a stable economic growth, demand for goods and services was not yet as strong, given the backdrop of hyperinflation and how it had eroded savings and spending power. Companies were still trying to get back to former levels of glory and clearing legacy debt, hence misaligning performances and valuations compared to the overall economy.
For the period between 2014 and 2019, huge volatility was largely ushered in by the emergence of inflation as the economy shifted from a purely USD economy. In 2019, the economy officially recognised the Zimdollar and this led to a massive devaluation which was carried through into the market.
As the Zimdollar struggled to find a balance against the USD, the stock market speculatively moved, countering anticipated currency losses. This phenomena has had the most impact on the stock market over the last two years between 2020 and 2021. What this means is that the performance of the stock market in Zimbabwe needs to be closely read in the context of the environment. If the status quo of volatility is to prevail it is therefore likely that the stock market will continue to show huge paces of growth ahead of the regional peers. For statistical presentation, the huge growth in stock market gains at about 630% in 2020 was in line with the huge depreciation in the currency which was seen at about 79% on the formal market. In 2021 the stock market surged by 320% while the currency shed about 30% only. This shows the impact of currency depreciation on the stock market performance.
Other factors, such as GDP mentioned above take centre stage only when there is low volatility or high market stability. In 2021 it was expected that GDP would rise by 7,5% from a negative return of about 10% in 2020 and thus it is also likely that some of the gains in selected outperforming companies was due to their rising earnings. Into 2022 our expectations are that the macro volatility will remain in place. We expect swings in the same range as 2021 and thus a growth in market gains of above 100% in real terms. We see election spend and sustained better agricultural produce as catalytic to this projected performance. Investors will be better hedged against the volatility by concentrating investment in top quality heavy cap companies, while taking cautious bets on some mid-tiers showing exceptional operational performance and strong business models.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net