RESEARCH firm Inter Horizon Securities (IH) says it continues to observe a dislocation between fundamentals and performance of the Zimbabwe Stock Exchange (ZSE), due to the depreciation of the local currency amid excess liquidity on the market.
Liquidity conditions on the ZSE continue to mirror the economy at large with a well-observed dislocation between the performance of the exchange and fundamentals, IH has observed.
In that regard, ZSE saw several firms delist in favour of the US dollar-denominated Victoria Falls Stock Exchange.
These were Innscor, Axia, Zimplow, First Capital Bank and African Sun.
In its latest year-to-date equity review released last week, IH said the market capitalisation for ZSE in real terms remained under pressure on account of delistings, rapid weakening of the Zimdollar.
Resultantly, the ZSE market capitalisation retreated 31% year-to-date on the exchange to US$1,49 billion in real terms.
“Value traded for the first 9,5 months of the year totalled US$108,49 million versus US$193,13 million in the same period in 2022,” IH said.
“This represents a negative variance of 44% y/y (year-on-year). The average daily value consequently decreased from US$0,98 million to US$0,56 million.”
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The firm noted that 1,47 billion shares exchanged hands within the period compared to 1,66 billion traded in prior year.
“On the ZSE, we continue to observe a dislocation between fundamentals and performance of the bourse. Cycles on the exchange have primarily been fuelled by money supply dynamics.
“A sustained tight monetary policy coupled with currency volatility has largely curtailed real capital gains on the exchange within the year,” IH said.
“The VFEX largely remains a buyer’s market characterised by price volatility. Forward looking, the uncertainty around money supply developments in 2023 propels us to lean more towards defensive stocks that have strong dividend policies in case capital gains remain subdued.
“Based on counters under the IH universe, median dividend yield currently stands at 3,1%. Presenting higher dividend yields are Delta (9,9%) and Innscor (5,6%).”
Based on the 2024 National Budget Strategy document, Treasury has set a target of ZWL$2,3 trillion as the budget deficit, which is 1,5% of the gross domestic product.
This is based on expected revenues of ZWL$30,7 trillion against expenditures of ZWL$33,1 trillion.
This will lead to increased money supply, resulting in a further depreciation of the local currency, which Treasury said would widen the fiscal deficit by about US$20,68 million.
“The operating environment remained fluid and largely characterised by exchange rate volatility. Consumer-facing companies such as Delta that have managed to establish a route-to-market into the forex-rich and fast-moving informal sector generally exhibited more resilience in terms of volume performance despite the troubled trading environment,” IH said.
“Formal retailers have generally borne the brunt of an uncompetitive dual pricing system with market share being reportedly lost to the informal markets. However, across the board companies have been reporting a steady increase in US$ sales allowing for capital investment into operations, replenishment of raw materials, and sustenance of current US$ dividend payouts.”
IH Securities reckons that while a dollarised environment had provided a hedge for companies, this had also seen corrections of margins with the crystallisation of costs.
“Debt financing in local currency at a minimum rate of 150% has proven to be costly, while US$ borrowings need to be cautiously matched to revenues. Relative to historical averages, the exchange remains undervalued providing for buying opportunities,” the firm added.
The firm, however, remained biased towards consumer names like Delta to be in a better position to navigate unforeseen economic turbulence.
