29 December 2011
DESPITE a spirited start, the stock market faltered in the last quarter of the year and with only a couple of days to go it looks certain that this year’s performance will be negative for both the industrial and mining indices.
This may look like a misnomer if one considers that the economy has registered growth, estimated at 9,3% by the Ministry of Finance.
Investors will be keen to forget 2011, but important lessons can be taken from it that if carried into the coming year may prove crucial for the stock market and the economy at large.
It is important to understand what went wrong in the first place. In 2009, the year that the multi-currency system was introduced, equities achieved phenomenal growth as the industrial and mining indices achieved growth of 52% and 85% respectively.
Some of this growth was justified as the markets were essentially pricing in the first signs of real growth after the aptly named ‘lost decade’. The question is how much of this accurately mirrored the growth in corporate earnings or economic indicators? Not much seems to be the answer we got from the market in the year 2010.
As corporate earnings started to slow down and the true financial health of some of the listed companies began to show, share price movements slowed down and both indices made marginal losses of less than two percent each for the year.
Instead of providing relief 2011 has proven to be yet another year of share price correction.
The industrial index has lost more than 8% of its value and the mining index an even more shocking 60%. At this point investors would be tempted to think that we have hit the bottom and it is the time to buy.
The first consideration to make when contemplating equity investments right now is the political outlook. Will we have elections, and if so will they be non-violent, free and fair? Foreign investors are the main drivers of stock market activity and political uncertainty unsettles them. Some would argue that foreigners coming into Zimbabwe would already have priced in the political risk.
This may well be, but there is reason to be concerned about something else. There is something brewing in the corporate world that may be the biggest determinant of market direction in 2012!
Deteriorating corporate performance, particularly from companies that are heavily borrowed, is a potential time-bomb that when it explodes will not only affect the specific companies but will leave investors questioning the adequacy of the monitoring mechanisms at the Zimbabwe Stock Exchange (ZSE) and the Securities Exchange Commission (SEC).
A few companies come to mind – Celsys has negative equity but continues to trade with no statement from either the ZSE or SEC. ART, RIO and StarAfrica are highly geared and making losses, Bindura is under “care and maintenance” but has not been suspended from trading on the market. Surely its going concern status is at risk.
These are just a few examples. Some of these companies have already received capital injections but are still just holding on for dear life. With local capital markets running dry and investors unable to inject capital into these companies yet again, the prospect of a corporate failure or two is not too farfetched.
So should investors then dismiss 2012 as yet another doomed year for the stock market? Not at all. While stock picking will inevitably have to be more meticulous, a bear market always presents a good window of opportunity to buy into quality counters. The only challenge is that it has become much harder to tell the good companies from the bad.
An investor will want to avoid the following; heavily borrowed companies — the cost of debt for most companies is exorbitant and carrying too much debt will eventually lead to trouble.
Also to be wary of are companies that compete with imported products. Whilst import substitution was an advantage during the days of hyperinflation, it is pricing and quality that are key considerations now.
With industrial capacity utilization still low in most sectors it is safe to assume that few are going to be able to achieve the efficiency needed to compete with cheaper imported products.
Another factor to take into account for next year is whether foreign investors will be as active as they were soon after dollarisation. With the economic troubles in Europe showing little signs of subsiding, it is likely that foreigners will stay away as they will probably be concentrating on their core portfolios back home.
We hope for the best in 2012 but fear it may not be the much needed year of recovery that stock market investors so desperately await.
AllAfrica – All the Time