Speculation fuels equities rally

Published: 08 September 2017

Speculation and a mad rush to preserve value has pushed up the value of equities as investors and fund managers scramble to hedge value amid heightened inflation fears and currency devaluation.

Most companies are already trading above their book values despite weak earnings.

Financial analysts say fundamentals are now a thing of the past on the local market with investors and fund managers rushing to buy what is left of shares on the Zimbabwe Stock Exchange (ZSE).

The sudden rally in equities, which has seen the value of the market rising beyond US$7,1 billion, is set to continue in the short to medium-term.

The central bank's decision to introduce bond notes is to blame for the economy's woes, investment analysts say.

Stocks have been on the rise since April.

In May, equities jumped 16,8% to close at 162,34 points propelled by a glut of Treasury Bill maturities and inflation fears in the Southern African country. The mainstream industrial index gained 19,9% in June and only 3% in July as the rally seemed to be easing.

Stocks surged 14,5% in August buoyed by strong demand for shares in the market and limited supply of securities. By August 31, the mainstream industrial index had gone up by 62,62%.

On a month-to-date basis, the index is up 6,82%.

Investment analysts this week said fundamentals no longer apply.

"The economy is in a crisis and the best thing to do for now is to take positions in equities. Essentially, fundamentals and valuation metrics don't matter anymore. Call it a mania or speculation but everybody realises they have to get some sort of real asset. It's the same on the properties side," an asset manager said.

MMC Capital co-founder and executive director Itai Chirume says the market is being driven by inflationary expectations.

"The market is pretty much being driven by inflationary expectations fueled by the ever-widening premium between the US dollar and RTGS (money supply growth). So valuations will be driven to very expensive levels," Chirume says.

Appetite for blue chips Delta, Econet, Innscor, Natfoods and Seed Co was renewed last month and is still growing.

The market closed Wednesday valued at US$7,1 billion, an all-time high since dollarisation.

Delta had a market cap of US$1,8 billion with Econet trailing at just above US$1 billion.

In its H1 report, MMC Capital research said a look at valuation metrics pointed to overvaluation.

"The price-to-earnings (P/E) valuation metric seems to validate what the RSI chart is pointing to, namely that the local bourse is currently overvalued and also prime for a reversal. The local bourse's P/E has expanded 103% (24,01x) since 2012 (23% relative to last year's P/E alone). This is compared to only 36% P/E expansion in the MSCI Frontier Markets index (14% relative to last year)," MMC Capital said in its half-year research note.

This is despite already higher valuation metrics for most companies at the end of July.The latest rally comes after another rally in the quarter to June. At the end of June equities seemed poised to break the US$6 billion market capitalisation record with investors piling further into equities in June.

Market analysts felt that once the US$6 billion record is broken, the market could start testing its resistance, but this has not been the case.

The ZSE's all-time peak since the adoption of multi-currency system was US$6 billion in terms of market capitalisation in May 2013.

"We are approaching elections and the last time we had an election, we experienced a peak point for the market. Also, asset managers are getting a bit of funds from clients," an investment analyst said.

This comes after another bull run in the fourth quarter of last year in the wake of reports central bank chief John Mangudya was forging ahead with plans to introduce bond notes.

"The market has also witnessed gains in small caps. In the early days of the rally, blue chips were propelling the gains and we were used to gains of 3% in a day's trade. Now, the gains are becoming marginal," the analyst said. "At the moment, investor focus has moved away from counters with a huge impact on the index to counters with small caps."
- Zim Ind

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