The Zimbabwe Stock Exchange had an interesting 2020. It has always been an interesting ride on the bourse but 2020 was truly a show of the range of emotions stock market investing can take you through. It outpaced severe inflation, saw a slump because of the coronavirus pandemic, was closed on allegations of involvement of some counters in the parallel market, saw off the threat of the much anticipated damp squib that became the VFEX and rose like a phoenix from the ashes to leave many who had jumped in very happy come to the end of the year. As such many would be wondering what to expect in 2021 from our main equity exchange.
A point to note
Forecasting is a very dangerous game which almost always leaves the forecaster with some sort of egg on their face. And that is in stable economies. Zimbabwe’s economy is far from stable with a plethora of challenges around every corner. While we currently enjoy relative exchange rate stability the broader economy is not well balanced and so the position the outlook for the economy varies from source to source. All forecasts are only as good as the assumptions they are based on. As we well know things can change very quickly in Zimbabwe.
Zimbabwe 2021 economic outlook
In the budget Finance Minister, Professor Mthuli Ncube indicated the government expects Zimbabwe’s economy to grow by 7.4% in 2021. For comparison’s sake, the economy is estimated to have shrunk somewhere between 4% and 7% in 2020. For now, the central bank has managed to put a stop to currency depreciation and therefore inflation which had a very positive impact on the ZSE in the 2nd half of 2021. We shall assume that this stability will be maintained through 2021. This is a critical assumption because many ZSE companies have foreign earnings and payments to make. So this impacts performance heavily.
ZSE 2021 outlook
The ZSE rallied in the first half of the year mostly based on inflation adjustments of share prices. The second half of the year after the June-July closure the rally was partly inflation adjustment and real gains, especially in November and December. It is reasonable to expect that there will be big gains on the ZSE in the year 2021 if conditions hold.
Not many losers
If we correct for currency depreciation the ZSE only had 5 stocks in total that lost value in 2020. This would suggest that we should see better returns in a stable year. As we continue with stable currency fundamentals of a business will take centre stage in investor sentiment on the ZSE. The possibility of predictable income in Zimbabwean and US dollar terms should provide the boost that many counters need in valuation.
Separating the wheat from the chaff
One of the early breakout winners of 2020 was cable manufacturer CAFCA. The company saw a boom in valuation after management decided to increase production runs and build up buffer stock. This was meant to ensure CAFCA could meet demand and insulate it from power and foreign currency challenges in the country. The management of companies and the quality of their decisions are going to count even more in the year to come.
Few losses but more painful
While there will be few losers the losses may hurt more. Firstly losing when the economy is moving towards stability and perhaps even growth is doubly painful. Secondly, the opportunity cost of losses when many around you are gaining hand over fist is a very painful experience.
Long term focus
While stock markets tend to do well in the long run the ZSE has not really been a place for long term outlook. If, we can hold inflation and the exchange rate at bay long enough to start making the meaningful changes that are needed in our economy we can start to think about long term gains. This would attract more capital to the ZSE and more patient capital at that. This assumes many other issues will be brought into line.
The elephant in the room
I saved this one for last, not because it lacks importance but because it is a special circumstance that is out of the control of many participants. Last year there was a slump experienced in the entire economy as Covid-19 reached our shores and lockdown was necessitated. 2021 has started with another lockdown or Zimbabwe and most of the world. And this should not be taken lightly. While the ZSE has had a very positive January despite the lockdown if Covid-19 continues on its current path all positive forecasts can be thrown asunder.