Winning strategies for the brave…
2013
A pessimist sees the difficulty in every
opportunity; an optimist sees the
opportun...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
2
EXECUTIVE SUMMARY
The focus of this report is to articulate our views on th...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
3
ZIMBABWE – MACRO-ECONOMIC OVERVIEW
Economy grew on average 6.68% in the pas...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
4
.....Inflation has been maintained below
5% and the lowest in the region......
ZIMBABWE: POST ELECTION SYNOPSIS
5
The country’s trade deficit has remained
relatively high due to disproportionately
larg...
ZIMBABWE: POST ELECTION SYNOPSIS
6
The local bourse turned over $265.2m in
the H1 of the year on foreign support
while the...
ZIMBABWE: POST ELECTION SYNOPSIS
7
“heavy weight blue chip counters dragged
the market down having suffered huge
casualtie...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
8
Stock market poised for the next level of
growth.....
Equities Market Outlo...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
9
We envision 3 possibilities, the spectrum
of which stretches from a Best Ca...
ZIMBABWE: POST ELECTION SYNOPSIS
10
Sector
Beverages
Agro
Property
: POST ELECTION SYNOPSIS August 2013
Market Cap FY 2013...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
11
Cont’.............
Sector Sector Analysis Stock Picks
Conglomerate
Rebound...
ZIMBABWE: POST ELECTION SYNOPSIS August 2013
12
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Zimbabwe Post Election Synopsis: Investment Climate

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Zimbabwe Investment Environment: Post Election Environment

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Zimbabwe Post Election Synopsis: Investment Climate

  1. 1. Winning strategies for the brave… 2013 A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty Winning strategies for the brave… 2013 A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty
  2. 2. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 2 EXECUTIVE SUMMARY The focus of this report is to articulate our views on the macro-economic landscape for the Zimbabwean economy in 2014 and as well in the last half of the year 2013, with significant attention accorded to the stock market. Five years on in a dollarized environment, the economy has maintained in its growth tracks, despite abating macroeconomic fundamentals continuing to take hold in the first half of the year, due in part to political uncertainty and funding challenges. The economic trajectory has been revised downwards to expand by 3.4%, from initial target of 5%, after recording 4.4% growth in 2012. Meanwhile, inflation is expected to remain stable, recently revised from the original budget projection of 4.5% to 3%; the lowest in the region. While the basic understanding of a positive relationship exists empirically in most developed economies in the context of the stock market and economic growth, the Zimbabwean economy was not spared from the same notion. The local bourse exhibited a bullish streak in the first half of the year due to sustained movement in heavily capitalised counters. Overall, the main industrial index gained an impressive 38.6% at 211.19 points albeit the market turned over ~$222.6, down 13% versus the same period last year. Meanwhile, the resources index picked up 12.5% at 73.29 points. As a result market capitalization for the period breached the $5bn point mark at $5.4bn reflective of improved market sentiment in H1 of 2013. Major concern has been an essential side-way movement of major indices in the post elections era. Post election trading saw the mainstream Industrial index coming off a significant 18% from 232.87 points end-July 31 to 191.11 points as at 14 August 2013 amid political uncertainty in the wake of mixed reactions from varying political fronts and other external bodies. Quite clearly, the stock market losses in the post elections are perception driven despite immaterial changes in the core macroeconomic fundamentals, a scenario that supports our hypothesis. We are optimistic about the stock market while the current discounting of major indices brought in an opportunity for higher return profile in the investment field. With a stable government in place, sustained economic development is a distinct possibility. We are forecasting a target market capitalisation of $6.2bn for 2014, implying an upside potential of 27% on current levels, largely inbuilt in the clarity and consistency in policy formulation and implementation with one government, greater fiscal prudence to maintain fiscal stability and sustainable government deficit while the government remains committed to reducing the national debt overhang and achieve external sustainability through the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy ZAADDS, policy announced in 2012. However, the downside risk to our view remains largely beholden to the empowerment and indigenisation thrust.
  3. 3. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 3 ZIMBABWE – MACRO-ECONOMIC OVERVIEW Economy grew on average 6.68% in the past five years aback improved global demand and accommodating macroeconomic policies.... Economy has maintained in its growth tracks albeit at a decreasing rate..... Having experienced a persistent negative growth over the past decade of economic crisis, the Zimbabwean economy has rebounded significantly. Early signs of strong economic fundamentals that somewhat transformed the country into one of the leading economic powers of the African continent emerged in 2009. The introduction of US dollar in April 2009 as national currency has in actuality brought an immediate end to the country’s economic chaos - ushering in a clear cut-end to the period of ruinous hyperinflation and exchanged rate risk. Meanwhile, the conditions of doing business are better than the neighbouring countries albeit the tragedy of the commons in the inclusive government. Despite reflective of a negative growth of (-5%) on a compound annual basis for a longer period, between 2009 and 2012, the Zimbabwean economy’s growth averaged 6.68% over the past four years, aback the improved global demand and accommodating macroeconomic policies. Real GDP Growth, however, started to decelerate in 2012 to a level of 4.4%, indicative of a 6.2% and 5% drop against 10.6% achieved in 2011 and, the initial target for the year respectively. This reflects a slowdown in economic activity, in part due to inherent political and economic uncertainties around the economy’s political standoff. Indicative of the underperformance of key economic sectors namely, agriculture (due to a poor rainy season) and the mining sector, compounded by obsolete equipment, debt overhang and as well the liquidity challenges, has been a recent downward revision of 2013 economic growth rate to levels of 3.4% from initial 5% target for the year. However, in our view, with a stable government in place, sustained economic development is a distinct possibility. We anticipate a period of stable governance and strong growth in Zimbabwe, following the elimination of political quagmires within the inclusive government, through elections. Fig1: Real GDP Growth Trends Source: IMF, Zimtreasury. -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Zim/AfricaGDP% Southern africa GDP% Zim Real GDP % Africa Real GDP % Southern Africa Real GDP %
  4. 4. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 4 .....Inflation has been maintained below 5% and the lowest in the region..... Mining Sector growth has been revised downwards to expand by 5.3% while the agriculture sector was revised to a growth of 5.4% from the initial targets of 17.1% and 6.4% respectively. The downward trend in the mining sector is underpinned by the falling of international prices against an increasing production cost bill while the persisted challenges related to lack of long-term financing have had a profound effect on gold and the diamond houses. Meanwhile, the agriculture sector’s underperformance is imbedded in the erratic 2012/2013 rainy season. Inflation expected to remain stable In the context of the general price levels; In 2009, inflation dropped significantly (- 7.7%) from the record levels achieved in 2008. Since 2010, annual inflation levels averaged about 3.5%, which falls far below regional averages. With continued use of a stable US dollar in the economy, inflation levels are expected remain containable; maintaining within the manageable levels in the ensuing years at ~3%. Fig1 below depict the inflation developments in the economy and also shows how the transition to the US dollar as legal tender brought in a quick end to hyperinflation. Fig2: Annual Inflation for Zimbabwe Year Percentage 2000 55.2 2001 112.1 2002 198.9 2003 598 2004 132.7 2005 585.8 2006 1,281.50 2007 66,212.30 2008 231,000,000.00 2009 -7.7 2010 2.9 2011 4.9 2012 2.91 2013E 3.9 Source: ZIMSTAT, Monetary Policy Statements issued in terms of RBZ
  5. 5. ZIMBABWE: POST ELECTION SYNOPSIS 5 The country’s trade deficit has remained relatively high due to disproportionately large amount of imports .....Banking sector deposits increasing at a decreasing rate..... : POST ELECTION SYNOPSIS August 2013 The country still has immense trade deficit The Zimbabwean economic set up is in such a way that, depends largely on the export performance of the system doesn’t allow the country to stimulate the such as interest rates or exchange rates. As a result, the country’s aggregate exports have maintained an increasing trend since 2009, reflecting a CAGR of 34% through 2012. However, despite these developments, the country’s trade deficit has remained relatively high due to disproportionately large amount of imports. Figure 3 below, describes the developments of the country’s trade deficit subject to the movements of total exports and as well the total imports. Total imports since the inception of multicurrency have increased by 112 billion end-December 2012. The trade deficit is likely to narrow over the next 3 years as the export base increases particularly in the mining and agriculture sector; while greater fiscal prudence is expected to maintain fiscal stability government deficit. Exports, Imports and Trade Deficit Source: Ministry of Finance, RBZ Financial Services sector developments Stagnating growth in the deposit base against a more than proportionate increase in funding requirements continues to adequately matching the economy’s funding needs. Total deposits increased by 5.3% from $4.2 billion in January 2013 to $4.4 billion while total banking sector loans and advances increased by 5.56% from US$3.4 billion to US$3.59 billion. To date, total deposits are estimated to have dropped approximately by $800m attributed to the uncertainties around the dispensation. Revenues in the sector were confronted by the MoU agreement established earlier on in the year which overall affec performance of non funded income. Capitalisation was a major highlight over the period in the sector with 12 institutions having been reported to have fully complied as at 31 March 2013 . -4000 -2000 0 2000 4000 6000 8000 2009 2010 2011 Exports August 2013 The Zimbabwean economic set up is in such a way that, the growth of the economy rmance of the country, since the multicurrency he economy through instruments exchange rates. As a result, the country’s aggregate exports have maintained an increasing trend since 2009, reflecting a CAGR of 34% through 2012. However, despite these developments, the country’s trade deficit portionately large amount of imports. the developments of the country’s trade deficit subject to the movements of total exports and as well the total imports. Total imports since the inception of multicurrency have increased by 112% to levels of ~$5.2 rade deficit is likely to narrow over the next 3 years as the export base increases particularly in the mining and agriculture sector; expected to maintain fiscal stability and sustainable Stagnating growth in the deposit base against a more than proportionate increase in funding requirements continues to incapacitate the sector from adequately matching the economy’s funding needs. Total deposits increased by 5.3% from $4.2 billion in January 2013 to $4.4 billion while total banking sector loans and advances increased by 5.56% from US$3.4 billion to 9 billion. To date, total deposits are estimated to have dropped approximately by $800m attributed to the uncertainties around the political . Revenues in the sector were confronted by the MoU agreement established earlier on in the year which overall affected the performance of non funded income. Capitalisation was a major highlight over the period in the sector with 12 institutions having been reported to 2012 2013 Imports
  6. 6. ZIMBABWE: POST ELECTION SYNOPSIS 6 The local bourse turned over $265.2m in the H1 of the year on foreign support while the market was capitalised at ~$5.4bn. Fig 3 : POST ELECTION SYNOPSIS August 2013 Fig 3: Financial Sector total deposit and total loans Source: RBZ, Ministry of Finance The Zimbabwe Stock Market Overview H1 2013 Sustained foreign portfolio demand on heavyweight caps shouldered the main industrial index to a 39% growth at 211.19 points end counters put up a moderate performance at 73.29points up 12.5% on a year to date basis. However, the post election trading saw the mainstream Industrial index coming off a significant 18% from 232.87 points end 14 August 2013 amid political uncertainty in the wake of mixed reactions from varying political fronts and other external bodies despite core macroeconomic fundamentals. The response by capital markets to political events is neither unexpected nor is it unique to Zimbabwe alone, ac and the globe at large capital markets have always played barometer to their surrounding environment, chiefly the political environment. Fig 4 explain foreigners have contributed to the local bourse. Fig 4- Turnover and the Foreign Participation Source: ZSE/ FBC Securities 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Jan-09 Jan-10 Jan Total Deposits US$m $- $100.00 $200.00 $300.00 $400.00 $500.00 $600.00 FY 2009 FY 2010 FY 2011 Fy 2012 Turnover US$ mil Foreign Purchases US$ mil Foreign Sales US$ mil Foreign Portfolios % contribution August 2013 Sustained foreign portfolio demand on heavyweight caps shouldered the main industrial index to a 39% growth at 211.19 points end-June 2013 as the resource ormance at 73.29points up 12.5% on a year to date basis. However, the post election trading saw the mainstream Industrial index coming off a significant 18% from 232.87 points end-July 31 to 191.11 points as at the wake of mixed reactions from ther external bodies despite insignificant changes in the core macroeconomic fundamentals. The response by capital markets to political events is neither unexpected nor is it unique to Zimbabwe alone, across the region and the globe at large capital markets have always played barometer to their surrounding environment, chiefly the political environment. Fig 4 explains how Jan-11 Jan-12 Total Deposits US$m 0% 10% 20% 30% 40% 50% 60% 70% Fy 2012 H1 2013 H2 2013 Foreign Purchases US$ mil Foreign Portfolios % contribution
  7. 7. ZIMBABWE: POST ELECTION SYNOPSIS 7 “heavy weight blue chip counters dragged the market down having suffered huge casualties following the political dispensation................... The industr : POST ELECTION SYNOPSIS August 2013 The industrial and the mining index took a knock on political uncertainty Despite a better first half, in the post election era, dragged the market down having suffered huge casualties following the political dispensation; this was despite operating under the same fundamentals with nothing much on the economic front having changed (market base, capital investment, growth projections, and competitive environment). Fig 5 below shows our bullish sentiments on the stock market with the industrial index poised to close at 165 points while the mining index is set to close at 55 points end Fig 5- Industrial and mining Index trends Source: ZSE,FBC Securities In the region, Zimbabwe was ranked second to Ghana by measure of Return for H1 2013 with 38.6% return for the period; with relatively low PE ratio and PEG Ratios, Zimbabwe is still a good haven for investment with potential to achieve above average regional return achievement. African Markets H1 2013 Performance Source: Investing in Africa 152 151 146 152 186 200 101 65 0 50 100 150 200 250 FY 2009 FY 2010 FY 2011 Fy 2012 Industrial Index Mining Index 0 5 10 15 20 25 Nigeria JSE Ghana Mauritius Zimbabwe Kenya Zambia Botswana IvoryCoast Nambia PEG/PERatios PEG Ratio P/E Ratio August 2013 a knock on political uncertainty , heavy weight blue chip counters suffered huge casualties following the political ; this was despite operating under the same fundamentals with nothing much on the economic front having changed (market base, capital investment, growth projections, and competitive environment). Fig 5 below shows our bullish with the industrial index poised to close at 165 points while the mining index is set to close at 55 points end-Dec 2013. In the region, Zimbabwe was ranked second to Ghana by measure of Return for H1 2013 with 38.6% return for the period; with relatively low PE ratio and PEG Ratios, Zimbabwe is still a good haven for investment with potential to achieve above 152 211 165 174 73 55 68 H1 2013 H2 2013 est H1 2014 est Mining Index -30% -20% -10% 0% 10% 20% 30% 40% 50% Nambia Uganda Tanzania Malawi S&P500 H12013 % Return P/E Ratio
  8. 8. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 8 Stock market poised for the next level of growth..... Equities Market Outlook Despite the cynical but pragmatic stance adopted by many industry players with regards the political landscape, the cloud of uncertainty is starting to clear off as Industry captains start engaging political leaders seeking clarity on key economic policies and the way forward. It is evident that business leaders are eager to put politics in the past and get back to business as usual; this sentiment is shared among many other participants in both local and international political and economic fronts, consequently we see the political events paving way for economic efforts in the near future. Positive Earnings surprises in many blue chip counters in the second half are expected to lead recovery efforts on the Zimbabwe Stock Exchange, giving argument for stock picking at a time when the counters have been discounted following the recent political events. Operational developments on the Stock Exchange expected to increase efficiency and attract more foreign participation. In efforts to improve operational efficiency on the ZSE and encourage alignment to other global capital markets, essential changes have been made to the operational landscape at ZSE in the first half; chief among them was the development of a comprehensive Website with crucial investor guide information, the acquisition of CSD (Central Statistical Database) system which has given momentum to automation efforts currently underway at the local bourse and a change of management in efforts to align the work force to the dynamic vision of the Exchange. The above mentioned developments will go a long way towards encouraging efficiency, transparency and regional and international integration and alignment of the Exchange with other Capital markets in addition to opening it up to the reach of other foreign Investors. Key Investment power points for the ZSE remain: The end of the GNU (Government of National Unity) has brought an end to policy inconsistencies and contradictions, tension and discord within the Government bringing a systematic, consistent and defined way of policy formulation and implementation that eliminates divisions with regards key Economic policy implementation. Investment thrives on certainty and consistency of gazetted policy to assess the Risk and Return profiles on investments; with long term policy clearly defined and understood, Investors with enough Risk appetite can make calculated Investment decisions basing on the policy at play in the Zimbabwean market, a phenomenon that the market has been waiting for since the inception of the GNU. Growing interest in Africa from the emerging and developed countries is expected to continue driving growth across the region as resource hungry emerging and developed countries scramble to consolidate their positions in resource rich Africa leading to increased economic and financial activity in African markets. Zimbabwe has immense Investment absorption capacity in key sectors among them, Mining, Agriculture, Manufacturing and Energy. With Investment friendly infrastructure and policy frameworks, Foreign Investment in both Direct and Portfolio form is expected to grow thereby fueling activity on the ZSE.
  9. 9. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 9 We envision 3 possibilities, the spectrum of which stretches from a Best Case, Probable Case to a Worst Case scenario. Stability in global macroeconomic environment combined with increased liquidity evidenced by stabilizing Euro Zone and sustainable growth in emerging and developed markets is set to have spill-over effects into Africa particularly the Sub- Saharan Region, Zimbabwe stands to gain from this growth in the global economy with increased financial economic and technical support and engagement from the international community which will have spill-over effects into capital markets. Scenario Analysis for the ZSE H2 2013 run We envision 3 possibilities, the spectrum of which stretches from a Best Case, Probable Case to a Worst Case scenario. The Best case scenario would be facilitated by a quick transition from politics to economics accompanied by Economic stimulus policies which will aid in increasing national output and attracting Investments along with technical and financial support: this will see the ZSE recovering from post election loses to close the year at 198.77 Points to anchor at a FY 2013 return of 30% The most probably case given our assessment of unfolding political and economic events is a result of a slow shift from Politics to Economics, which would see a gradual but slow attraction of foreign participation in the Economy and the financial markets, economic performance will be largely as predicted in the first half as no fundamental changes would have taken effect, in which case the mainstream Industrial Index would close at 165.00 points to close 2013 at FY return of 8%. Worst Case scenario would be product of unrelenting political apprehension and uncertainty coupled with disentanglement from the International Investment community, slow economic reform and resource mobilization, Fiscal revenue underperformance and slow key sector reforms, stifled technical and financial support from regional peers: this would see the ZSE reverse entirely all the gains of H1 to close the year in the Red at 145.50 points, a FY 2013 loss of 5%. Fig 6 -ZSE H2 and FY% Return Scenario Source: FBC Securities -11% -5.9% -21.9% -31.1% 23% 30% 8% -5% -40% -30% -20% -10% 0% 10% 20% 30% 40% Current Best case H2 close Probable Case H2 Close Worst case H2 Close ZSE H2 & FY % Return Scenarios H2 2013 % change FY 2013 % change
  10. 10. ZIMBABWE: POST ELECTION SYNOPSIS 10 Sector Beverages Agro Property : POST ELECTION SYNOPSIS August 2013 Market Cap FY 2013 US $bn: Scenario Analysis Source: FBC Securities Equities Strategy Accordingly we have developed a list of stocks to keep an eye on in premised on the fundamentals of their business models which in our view appear sustainable into the future. Justification of selected list is based on our belief that the stocks are trading at either significant discounts to the value we envisage in them in the future or the potential returns that could accrue from these stocks in the ensuing period subject to their strategic business mandates. Sector Outlook and Our Stock Picks Sector Sector Analysis Beverages While Per Capita consumption still trails the regional averages, promises for improving disposable incomes, position the sector for better performance. Agro- Processing There is still excess capacity within the sector with Zimbabwe having been an agro based economy, efforts to revive the sector to improve production and efficiency present positive growth opportunities for players in the sector. Property Infrastructure development gap creates room for investment in the sector and sustainable demand. $- $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 FY 2012 Current Best case FY 2013 August 2013 Market Cap FY 2013 US $bn: Scenario Analysis Accordingly we have developed a list of stocks to keep an eye on in H2 and 2014 on the fundamentals of their business models which in our view appear sustainable into the future. Justification of selected list is based on our belief that rading at either significant discounts to the value we envisage in them in the future or the potential returns that could accrue from these stocks in the ensuing period subject to their strategic business mandates. Stock Picks Stock Picks While Per Capita consumption still trails the regional averages, promises for improving disposable incomes, position the sector for Delta Afdis There is still excess capacity within the sector with Zimbabwe having been an agro- based economy, efforts to revive the sector to improve production and efficiency present positive growth opportunities for Hippo Seed-Co BAT Natfoods Dairibord Infrastructure development gap creates room for investment in the sector and ZPI Pearl Masimba Best case FY 2013 Probable Case FY 2013 Worst case FY 2013
  11. 11. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 11 Cont’............. Sector Sector Analysis Stock Picks Conglomerate Rebounding economic fundamentals across key sectors present future economic benefits for diversified business portfolios as most key sectors operate below full capacity. TSL Innscor Meikles ICT Improved infrastructure development and investment to support a transition from voice to data which has become pivotal in consonant with technological advancement. Econet has enough capital to respond to market dynamics and competition. Econet Mining Stabilisation of global commodity prices aback cementing demand from emerging economies opens opportunities for the sector. Encouraging resource management policies coupled with capital investment in the sector will play catalyst to capacity utilisation recovery efforts . Hwange Rio Zim Falgold Manufacturing Manufacturing sector is poised for growth citing adequate supply side support from the agriculture and other sectors, and sustainable demand from local, regional and international markets. The sector has good infrastructure and with the necessary capital support will achieve production efficiencies and competitiveness while excess capacity to absorb expansion efforts exist. Turnall Zimplow Retail Notwithstanding the firm possibility of increased disposable incomes, the current consumer base provides sustainable demand. Adequate capitalisation and resource mobilisation will see players benefiting from increasing local and regional demand. Ok-Zim Edgars Tourism Stability in the macro-economic and political landscape will see revenues in the sector improving. AfricanSun Financial Services Sector vulnerabilities, recapitalisation concerns and the effects of MoU remain forces to reckon with. FBC CBZ
  12. 12. ZIMBABWE: POST ELECTION SYNOPSIS August 2013 12

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