Five stocks to watch on ZSE in 2022
Last year was yet another exciting year for investors focused on the Zimbabwe Stock Exchange (ZSE). Turbulence, particularly that emerging from exchange rate movements and inflation, would sometimes drive the rollercoaster market on steep downward slopes in real terms and before you know it, the market would mount a strong comeback, going past parity to positive real returns.
At the end, the stock market closed with an annual return of 311%, but after discounting for 30% currency devaluation would give a real return of about 200%.
Even after factoring the parallel market rate movement, the real return was about 150%. The net outturn completed a double for the ZSE, which scooped the top spot as the best performing bourse in sub-Saharan Africa in 2020, after posting yet another three-digit gain.
The question on most investors' minds is whether this run can be sustained into this year and if so which counters should one look at. These reflections are quite paramount given the risks inherent in volatility which if mismanaged could tilt in the adverse direction.
We have made efforts to look at the market and come up with an investment strategy which we believe can be utilised to achieve better results. In-fact our overarching macro view is that the economic conditions which prevailed in Zimbabwe last year will remain unchanged and hence we expect similar turbulence and an overall outperformance of the stock market to the magnitude of last year.
Markets are pushed by various factors but our current model is overweight on macro fundamentals. Our view is that when an economy is undergoing serious challenges of the magnitude that Zimbabwe currently is, macro factors tend to cloud and diminish the impact of other factors on the overall direction the stock market is supposed to take.
Another approach to look at the stock market would be to use the bottom up approach, where company specific fundamentals take precedence and then an overview is factored to determine chances. We believe this approach is best suited for a more stable macro environment.
What exactly is it that we see?
Inflation moderation is a function of currency stability, a variable which we see as becoming more volatile as we go. The expanding imports, opening up of informal money transfer channels and a move away from risk aversion in the global markets, which hurts exports of gold, are factors that are likely to keep pressure on foreign receipts.
Internally, we do not see the government sticking to the end, on its approach to conservative spend dictated by available resources. This means there is a high risk of monetary implosion and already there appears to be an imbalance in the market where Zimbabwean dollar money supply is relatively higher.
So this background supports perpetuation of macro instability and risk aversion through the stock market. To cap it further, 2023 is an election year and what we have seen historically is that government spend increases and thus drives actual demand for goods and services in the economy.
Already, the government has increased civil services wages by about US$35 after agreeing to pay allowances in US dollars. This means that average civil service incomes increased by over 25% in real terms. This comes even as civil servants are clamouring for more. What this means is that the average citizen’s spend will also go up and thus drive the fundamental performance of listed companies up.
But given the prevailing environment it is not every company that wins and among winners, some win more while others win less.
We have picked counters that we believe are best suited to weather the storm and emerge stronger while earning higher valuations. These companies’ valuations will be supported by strong business models operating in mature markets. These companies have strong management and resilient models and are mostly seen as value counters exhibiting growth qualities.
Most of the counters are already trading at valuations below their intrinsic levels and were ripe for correction as the year began.
Our favourites for the year are Delta Corporation, a beverages manufacturer with diversified operations both from a regional perspective and product offering. The company is a market leader and has invested heavily in its operations.
Fundamentals support a strong price correction. Simbisa Brands is a pan-African restaurant operator with significant growth potential. The company is mature in some of its markets, but looked at from a wholesome perspective, there is significant room for growth and recovery both in the key market of Zimbabwe and the rest of the region.
The rest of our top five include Padenga, which is now predominantly a mining company and recently moved to the VFEX and Hippo Valley, the sugar producing company.