2014 was a troubling year for Zimbabwean investors. The industrial index lost 20 percent and the real estate market underperformed as shown by financial results of property funds.
Despite a US dollar denominated economy, Zimbabwe completely missed one the decade’s greatest giveaway – cheap money created in Europe and the US. Low interest capital could have encouraged risk taking and created liquidity in the market – thanks to our murky indigenisation policy.
The IMF November country report points to an ambitious 3.2 percent GDP growth rate for 2015. We worry that this growth will not be derived from consumption but from other sources such as import cuts and bilateral funding support. So while the economy will grow on paper, the consumer will not feel better off.
Below we have discussed our investment perspective for 2015.
Equities – Industrial
Looking ahead in 2015, most stocks will suffer from a synchronised economic deceleration. We expect earnings to shrink in 2015 leading to depressed if not negative returns. Unlike in recent years when economic GDP was fuelled by private consumption, this year a contraction in consumer spending is highly probable. We expect a fall in consumption to negatively affect the value of consumer stocks such as BAT, Delta and OK.
Equities – Miners
Contrast to industrial index which lost 20%, the mining index rose by 71% in 2014. We expect miners’ plans to reopen shafts, explore new mines and restart smelters to spur their performance in 2015.
However, record low commodity prices make mining companies a tough call. Gold prices have inched up since beginning of 2014 while industrial metals prices have been a mixed story altogether.
Selective picking will be important. As Europe considers quantitative easing too we forecast a built up in inflationary pressure which will drive investors into inflation hedges such as Gold making the metal a good pick now.
Equities – Major exporters
In the past 12 months we have punted the idea of exporters. Our top picks have been Seed Co, Padenga and for a while Bindura Nickel.
The logic was simple- significant exporters are to an extent insulated from the problems of the domestic market. But not only do these companies sell in growing markets, they are producing in a market where costs of production are deflating while selling in inflationary markets.
The recent national budget also gave exporters a shot. The Finance Minister cut corporate tax for firms that export more than 50% of their produce. That automatically boosts 2015 earnings by 14%. Our three selected stocks fit the bill – yet we do not think they are fully re-priced.
Property has lost its shine and has begun to look like an overcrowded trade. Post dollarization, residential property was driven by diaspora-house purchases and a resurgent domestic mortgage market. Both engines have since lost steam and we are left with falling property rentals and prices – notwithstanding a known residential property deficit. The same can be said of commercial property.
A shrinking manufacturing sector is leaving excess capacity, consequently driving both prices and rentals down. These assertions can be backed by financial results of listed property funds. Investors parking capital in property this year may do so with a long term investment horizon – hoping for some catalyst that reverses the cycle.
Fixed income securities
As the drying bank loan market, hamstrung by loan-deposit mismatch, continues to restrain long term financing, we expect credit worthy companies seeking capital to flock into bonds.
As long as defaults are kept at bay, we expect more issuances this year accompanied by a fall in coupon rates from the average of 10% for corporate bonds.
For now, the market remains excited though we worry about bonds raised on the premise that real estate is a safe asset class. Declining property prices and rental income make us fret.
If you earned your annual income in rand denomination and decided to save it in US dollar currency, by end of 2014 you would have earned a return of 12% – that is just a currency exchange rate gain.
Depressed oil prices, expected to remain until mid-year, will continue to drag down currencies of oil producing economies and of producers for commodities tied to oil prices.
Going forward, we think investors should be wary of rushing into stocks on the basis of low valuations. As the economy takes an uncertain path, quality trounces valuations.
Investors ought to focus on stocks that can withstand tough times. Low valuations will be best left to buyout firms that can delist these companies and panel beat them off the charts.
This phenomenon explains our forecast of several delistings this year.
Ray Chipendo is Head of Research at Emergent Research. email@example.com