ZSE stocks incredibly cheap, says Imara

Published: 18 October 2019
The Zimbabwe Stock Exchange (ZSE) is incredibly cheap at the moment and provides a viable and liquid hedge for long term savings such as pension funds, which are at risk of being wiped out by raving inflation, a leading local asset management company has said.

In a quarterly research note released this month, Imara Asset Management, said in real terms, stocks on the ZSE have not kept pace with the rise in the US dollar and could prove to be a real hedge against inflation.

Imara likened the current operating environment with the latter years of the last decade where the ZSE proved to be the best if not only hedge against hyperinflation of any asset that could be acquired with the former Zimbabwe dollar.

Then, as it is now, it was almost impossible to buy property with local currency and private equity was USD linked.

The ZSE was the only viable and time conscious market to invest in and hedge against currency depreciation.

"We see no reason why that phenomenon should not occur again this time around," said Imara.

The Asset Management firm pointed out the fact that the ZSE has not kept pace with inflation to date makes it "incredibly cheap".

As of Tuesday this week, the ZSE main industrials index was up 56,36 percent against estimated year-on-year inflation of 353 percent. At the last official count in June, year-on-year inflation had reached 175,66 percent making any capital gains negative.

Stock valuations are even more cheap in US dollar terms as compared to valuations back in 2008.

"Take Delta whose market valuation was US$359 million in September 2008. Today at the interbank rate it is US$319 million or as low as US$182 million using the OMIR at ZWL$26 to US$1.

"Yet Delta has invested US$450 million to modernise and upgrade its plant and equipment and has acquired new businesses within the region over the past five years.

"By mid-2013 Delta's valuation had risen to US$1,75 billion, a five-fold increase over five years."

Imara gave many other examples of local companies such as Dairibord, Proplastics and OK Zimbabwe, which have invested in plant and equipment among other areas using real US dollars but are valued less than those US dollar investments excluding prior dollarisation assets.

"All these are just a few examples where US$ assets can be bought at a large discount to their replacement value using ZWL and which offer potentially huge upside in US$ terms," said Imara.

Imara dismissed property construction or purchase as an alternative investment option as the assets need US$ linked inputs to bring them to completion.

With local transactions or savings now in local dollars investing in US$ linked assets now will be more than difficult given the runaway exchange rate.

Imara reckons buying stocks at current levels is a "bargain" in US$ terms.

"We have no idea whether we saw the bottom of the ZSE in August or not but what we do know is that the US$ valuations of the counters we own offer enormous US$ upside at some point in future," said Imara.

"The same cannot be said for any monetary assets available on the money market today."

"There are very few liquid hard assets available for pension funds that can be bought for ZWL$ speedily. Listed equities remain the safest proven investment in such an inflationary environment."

The other asset class on the market are Treasury Bills, but they are in local dollars and unlike equities will not one day revalue in USD terms.

Banks, which are holding a large chunk of Treasury Bills and have of late been excluded from TBs offers, are at risk of shrinking balance sheets in the future, according to Imara.

With companies given the go ahead to prepare hyperinflation accounts they are likely to revalue their property, plant and equipment in local dollars and in the process boosting their balance sheet.

But TBs holding financial institutions will not have the same privilege living their balance sheets smaller than those of the companies they would want to lend to.

According to Imara this is already becoming apparent in the agriculture sector where in US dollar terms the amounts that banks can lend have become too small to make a difference.

The same phenomenon is being witnessed in the property sector where the mortgages banks are prepared to offer are insignificant for prospective home owners.
- ebusiness
Tags: ZSE,


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