zimbabwe post election synopsis: investment climate

Winning strategies for the brave…

2013

A pessimist sees the difficulty in every

opportunity; an optimist sees the

opportunity in every difficulty

Winning strategies for the brave…

2013

A pessimist sees the difficulty in every

opportunity; an optimist sees the

opportunity in every difficulty

ZIMBABWE: POST ELECTION SYNOPSIS August 2013

2

EXECUTIVE SUMMARY

� The focus of this report is to articulate our views on the macro-economic landscape

for the Zimbabwean economy in 2014 and as well in the last half of the year 2013,

with significant attention accorded to the stock market. Five years on in a dollarized

environment, the economy has maintained in its growth tracks, despite abating

macroeconomic fundamentals continuing to take hold in the first half of the year,

due in part to political uncertainty and funding challenges. The economic trajectory

has been revised downwards to expand by 3.4%, from initial target of 5%, after

recording 4.4% growth in 2012. Meanwhile, inflation is expected to remain stable,

recently revised from the original budget projection of 4.5% to 3%; the lowest in

the region.

� While the basic understanding of a positive relationship exists empirically in most

developed economies in the context of the stock market and economic growth, the

Zimbabwean economy was not spared from the same notion. The local bourse

exhibited a bullish streak in the first half of the year due to sustained movement in

heavily capitalised counters. Overall, the main industrial index gained an impressive

38.6% at 211.19 points albeit the market turned over ~$222.6, down 13% versus

the same period last year. Meanwhile, the resources index picked up 12.5% at

73.29 points. As a result market capitalization for the period breached the $5bn

point mark at $5.4bn reflective of improved market sentiment in H1 of 2013.

� Major concern has been an essential side-way movement of major indices in the

post elections era. Post election trading saw the mainstream Industrial index

coming off a significant 18% from 232.87 points end-July 31 to 191.11 points as at

14 August 2013 amid political uncertainty in the wake of mixed reactions from

varying political fronts and other external bodies. Quite clearly, the stock market

losses in the post elections are perception driven despite immaterial changes in the

core macroeconomic fundamentals, a scenario that supports our hypothesis. We

are optimistic about the stock market while the current discounting of major

indices brought in an opportunity for higher return profile in the investment field.

� With a stable government in place, sustained economic development is a distinct

possibility. We are forecasting a target market capitalisation of $6.2bn for 2014,

implying an upside potential of 27% on current levels, largely inbuilt in the clarity

and consistency in policy formulation and implementation with one government,

greater fiscal prudence to maintain fiscal stability and sustainable government

deficit while the government remains committed to reducing the national debt

overhang and achieve external sustainability through the Zimbabwe Accelerated

Arrears Clearance, Debt and Development Strategy ZAADDS, policy announced in

2012. However, the downside risk to our view remains largely beholden to the

empowerment and indigenisation thrust.


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ZIMBABWE – MACRO-ECONOMIC OVERVIEW

Economy grew on average 6.68% in the past

five years aback improved global demand

and accommodating macroeconomic

policies....

Economy has maintained in its growth tracks albeit at a decreasing rate.....

� Having experienced a persistent negative growth over the past decade of

economic crisis, the Zimbabwean economy has rebounded significantly. Early

signs of strong economic fundamentals that somewhat transformed the country

into one of the leading economic powers of the African continent emerged in

2009. The introduction of US dollar in April 2009 as national currency has in

actuality brought an immediate end to the country’s economic chaos - ushering in

a clear cut-end to the period of ruinous hyperinflation and exchanged rate risk.

Meanwhile, the conditions of doing business are better than the neighbouring

countries albeit the tragedy of the commons in the inclusive government.

� Despite reflective of a negative growth of (-5%) on a compound annual basis for a

longer period, between 2009 and 2012, the Zimbabwean economy’s growth

averaged 6.68% over the past four years, aback the improved global demand and

accommodating macroeconomic policies.

� Real GDP Growth, however, started to decelerate in 2012 to a level of 4.4%,

indicative of a 6.2% and 5% drop against 10.6% achieved in 2011 and, the initial

target for the year respectively. This reflects a slowdown in economic activity, in

part due to inherent political and economic uncertainties around the economy’s

political standoff.

� Indicative of the underperformance of key economic sectors namely, agriculture

(due to a poor rainy season) and the mining sector, compounded by obsolete

equipment, debt overhang and as well the liquidity challenges, has been a recent

downward revision of 2013 economic growth rate to levels of 3.4% from initial 5%

target for the year. However, in our view, with a stable government in place,

sustained economic development is a distinct possibility. We anticipate a period of

stable governance and strong growth in Zimbabwe, following the elimination of

political quagmires within the inclusive government, through elections.

Fig1: Real GDP Growth Trends

Source: IMF, Zimtreasury.

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Zim

/Afr

ica

GD

P %

So

uth

ern

afr

ica

GD

P %

Zim Real GDP % Africa Real GDP %

Southern Africa Real GDP %


4

.....Inflation has been maintained below

5% and the lowest in the region.....

� Mining Sector growth has been revised downwards to expand by 5.3% while the

agriculture sector was revised to a growth of 5.4% from the initial targets of 17.1%

and 6.4% respectively. The downward trend in the mining sector is underpinned by

the falling of international prices against an increasing production cost bill while the

persisted challenges related to lack of long-term financing have had a profound

effect on gold and the diamond houses. Meanwhile, the agriculture sector’s

underperformance is imbedded in the erratic 2012/2013 rainy season.

Inflation expected to remain stable

� In the context of the general price levels; In 2009, inflation dropped significantly (-

7.7%) from the record levels achieved in 2008. Since 2010, annual inflation levels

averaged about 3.5%, which falls far below regional averages. With continued use

of a stable US dollar in the economy, inflation levels are expected remain

containable; maintaining within the manageable levels in the ensuing years at ~3%.

Fig1 below depict the inflation developments in the economy and also shows how

the transition to the US dollar as legal tender brought in a quick end to

hyperinflation.

Fig2: Annual Inflation for Zimbabwe

Year Percentage

2000 55.2

2001 112.1

2002 198.9

2003 598

2004 132.7

2005 585.8

2006 1,281.50

2007 66,212.30

2008 231,000,000.00

2009 -7.7

2010 2.9

2011 4.9

2012 2.91

2013E 3.9

Source: ZIMSTAT, Monetary Policy Statements issued in terms of RBZ

ZIMBABWE: POST ELECTION SYNOPSIS

5

The country’s trade deficit has remained

relatively high due to disproportionately

large amount of imports

.....Banking sector deposits increasing at a

decreasing rate.....

: POST ELECTION SYNOPSIS August 2013

The country still has immense trade deficit

� The Zimbabwean economic set up is in such a way that,

depends largely on the export performance of the

system doesn’t allow the country to stimulate the

such as interest rates or exchange rates. As a result, the country’s aggregate

exports have maintained an increasing trend since 2009, reflecting a CAGR of 34%

through 2012. However, despite these developments, the country’s trade deficit

has remained relatively high due to disproportionately large amount of imports.

Figure 3 below, describes the developments of the country’s trade deficit subject

to the movements of total exports and as well the total imports. Total imports

since the inception of multicurrency have increased by 112

billion end-December 2012. The trade deficit is likely to narrow over the next 3

years as the export base increases particularly in the mining and agriculture sector;

while greater fiscal prudence is expected to maintain fiscal stability

government deficit.

Exports, Imports and Trade Deficit

Source: Ministry of Finance, RBZ

Financial Services sector developments

� Stagnating growth in the deposit base against a more than proportionate

increase in funding requirements continues to

adequately matching the economy’s funding needs. Total deposits increased

by 5.3% from $4.2 billion in January 2013 to $4.4 billion while total banking

sector loans and advances increased by 5.56% from US$3.4 billion to

US$3.59 billion. To date, total deposits are estimated to have dropped

approximately by $800m attributed to the uncertainties around the

dispensation. Revenues in the sector were confronted by the MoU

agreement established earlier on in the year which overall affec

performance of non funded income. Capitalisation was a major highlight

over the period in the sector with 12 institutions having been reported to

have fully complied as at 31 March 2013 .

-4000

-2000

0

2000

4000

6000

8000

2009 2010 2011

Exports

August 2013

The Zimbabwean economic set up is in such a way that, the growth of the economy

rmance of the country, since the multicurrency

he economy through instruments

exchange rates. As a result, the country’s aggregate

exports have maintained an increasing trend since 2009, reflecting a CAGR of 34%

through 2012. However, despite these developments, the country’s trade deficit

portionately large amount of imports.

the developments of the country’s trade deficit subject

to the movements of total exports and as well the total imports. Total imports

since the inception of multicurrency have increased by 112% to levels of ~$5.2

rade deficit is likely to narrow over the next 3

years as the export base increases particularly in the mining and agriculture sector;

expected to maintain fiscal stability and sustainable

Stagnating growth in the deposit base against a more than proportionate

increase in funding requirements continues to incapacitate the sector from

adequately matching the economy’s funding needs. Total deposits increased

by 5.3% from $4.2 billion in January 2013 to $4.4 billion while total banking

sector loans and advances increased by 5.56% from US$3.4 billion to

9 billion. To date, total deposits are estimated to have dropped

approximately by $800m attributed to the uncertainties around the political

. Revenues in the sector were confronted by the MoU

agreement established earlier on in the year which overall affected the

performance of non funded income. Capitalisation was a major highlight

over the period in the sector with 12 institutions having been reported to

2012 2013

Imports


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The local bourse turned over $265.2m in

the H1 of the year on foreign support

while the market was capitalised at

~$5.4bn.

Fig 3


Fig 3: Financial Sector total deposit and total loans

Source: RBZ, Ministry of Finance

The Zimbabwe Stock Market Overview H1 2013

� Sustained foreign portfolio demand on heavyweight caps shouldered the main

industrial index to a 39% growth at 211.19 points end

counters put up a moderate performance at 73.29points up 12.5% on a year to date

basis. However, the post election trading saw the mainstream Industrial index

coming off a significant 18% from 232.87 points end

14 August 2013 amid political uncertainty in the wake of mixed reactions from

varying political fronts and other external bodies despite

core macroeconomic fundamentals. The response by capital markets to political

events is neither unexpected nor is it unique to Zimbabwe alone, ac

and the globe at large capital markets have always played barometer to their

surrounding environment, chiefly the political environment. Fig 4 explain

foreigners have contributed to the local bourse.

Fig 4- Turnover and the Foreign Participation

Source: ZSE/ FBC Securities

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Jan-09 Jan-10 Jan

Total Deposits US$m

$-

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

FY 2009 FY 2010 FY 2011 Fy 2012

Turnover US$ mil Foreign Purchases US$ mil

Foreign Sales US$ mil Foreign Portfolios % contribution

August 2013

Sustained foreign portfolio demand on heavyweight caps shouldered the main

industrial index to a 39% growth at 211.19 points end-June 2013 as the resource

ormance at 73.29points up 12.5% on a year to date

basis. However, the post election trading saw the mainstream Industrial index

coming off a significant 18% from 232.87 points end-July 31 to 191.11 points as at

the wake of mixed reactions from

ther external bodies despite insignificant changes in the

core macroeconomic fundamentals. The response by capital markets to political

events is neither unexpected nor is it unique to Zimbabwe alone, across the region

and the globe at large capital markets have always played barometer to their

surrounding environment, chiefly the political environment. Fig 4 explains how

Jan-11 Jan-12

Total Deposits US$m

0%

10%

20%

30%

40%

50%

60%

70%

Fy 2012 H1 2013 H2 2013

Foreign Purchases US$ mil

Foreign Portfolios % contribution


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“heavy weight blue chip counters dragged

the market down having suffered huge

casualties following the political

dispensation...................

The industr


The industrial and the mining index took a knock on political uncertainty

� Despite a better first half, in the post election era,

dragged the market down having suffered huge casualties following the political

dispensation; this was despite operating under the same fundamentals with nothing

much on the economic front having changed (market base, capital investment,

growth projections, and competitive environment). Fig 5 below shows our bullish

sentiments on the stock market with the industrial index poised to close at 165

points while the mining index is set to close at 55 points end

Fig 5- Industrial and mining Index trends

Source: ZSE,FBC Securities

� In the region, Zimbabwe was ranked second to Ghana by measure of Return for H1

2013 with 38.6% return for the period; with relatively low PE ratio and PEG Ratios,

Zimbabwe is still a good haven for investment with potential to achieve above

average regional return achievement.

African Markets H1 2013 Performance

Source: Investing in Africa

152 151 146152

186200

10165

0

50

100

150

200

250

FY 2009 FY 2010 FY 2011 Fy 2012

Industrial Index Mining Index

0

5

10

15

20

25

Nig

eri

a

JSE

Gh

an

a

Ma

uri

tiu

s

Zim

ba

bw

e

Ke

nya

Za

mb

ia

Bo

tsw

an

a

Ivo

ry C

oa

st

Na

mb

ia

PE

G/P

E R

ati

os

PEG Ratio P/E Ratio

August 2013

a knock on political uncertainty

, heavy weight blue chip counters

suffered huge casualties following the political

; this was despite operating under the same fundamentals with nothing

much on the economic front having changed (market base, capital investment,

growth projections, and competitive environment). Fig 5 below shows our bullish

with the industrial index poised to close at 165

points while the mining index is set to close at 55 points end-Dec 2013.

In the region, Zimbabwe was ranked second to Ghana by measure of Return for H1

2013 with 38.6% return for the period; with relatively low PE ratio and PEG Ratios,

Zimbabwe is still a good haven for investment with potential to achieve above

152

211

165174

7355

68

H1 2013 H2 2013

est

H1 2014

est

Mining Index

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Na

mb

ia

Ug

an

da

Ta

nza

nia

Ma

law

i

S&P

50

0

H1

20

13

%

Re

turn

P/E Ratio


8

Stock market poised for the next level of

growth.....

Equities Market Outlook

� Despite the cynical but pragmatic stance adopted by many industry players with

regards the political landscape, the cloud of uncertainty is starting to clear off as

Industry captains start engaging political leaders seeking clarity on key economic

policies and the way forward.

� It is evident that business leaders are eager to put politics in the past and get back

to business as usual; this sentiment is shared among many other participants in

both local and international political and economic fronts, consequently we see the

political events paving way for economic efforts in the near future. Positive

Earnings surprises in many blue chip counters in the second half are expected to

lead recovery efforts on the Zimbabwe Stock Exchange, giving argument for stock

picking at a time when the counters have been discounted following the recent

political events.

� Operational developments on the Stock Exchange expected to increase

efficiency and attract more foreign participation.

� In efforts to improve operational efficiency on the ZSE and encourage alignment to

other global capital markets, essential changes have been made to the operational

landscape at ZSE in the first half; chief among them was the development of a

comprehensive Website with crucial investor guide information, the acquisition of

CSD (Central Statistical Database) system which has given momentum to

automation efforts currently underway at the local bourse and a change of

management in efforts to align the work force to the dynamic vision of the

Exchange. The above mentioned developments will go a long way towards

encouraging efficiency, transparency and regional and international integration and

alignment of the Exchange with other Capital markets in addition to opening it up to

the reach of other foreign Investors.

Key Investment power points for the ZSE remain:

� The end of the GNU (Government of National Unity) has brought an end to policy

inconsistencies and contradictions, tension and discord within the Government

bringing a systematic, consistent and defined way of policy formulation and

implementation that eliminates divisions with regards key Economic policy

implementation. Investment thrives on certainty and consistency of gazetted policy

to assess the Risk and Return profiles on investments; with long term policy clearly

defined and understood, Investors with enough Risk appetite can make calculated

Investment decisions basing on the policy at play in the Zimbabwean market, a

phenomenon that the market has been waiting for since the inception of the GNU.

� Growing interest in Africa from the emerging and developed countries is expected

to continue driving growth across the region as resource hungry emerging and

developed countries scramble to consolidate their positions in resource rich Africa

leading to increased economic and financial activity in African markets. Zimbabwe

has immense Investment absorption capacity in key sectors among them, Mining,

Agriculture, Manufacturing and Energy. With Investment friendly infrastructure and

policy frameworks, Foreign Investment in both Direct and Portfolio form is expected

to grow thereby fueling activity on the ZSE.


9

We envision 3 possibilities, the spectrum

of which stretches from a Best Case,

Probable Case to a Worst Case scenario.

� Stability in global macroeconomic environment combined with increased liquidity

evidenced by stabilizing Euro Zone and sustainable growth in emerging and

developed markets is set to have spill-over effects into Africa particularly the Sub-

Saharan Region, Zimbabwe stands to gain from this growth in the global economy

with increased financial economic and technical support and engagement from the

international community which will have spill-over effects into capital markets.

Scenario Analysis for the ZSE H2 2013 run

� We envision 3 possibilities, the spectrum of which stretches from a Best Case,

Probable Case to a Worst Case scenario.

� The Best case scenario would be facilitated by a quick transition from politics to

economics accompanied by Economic stimulus policies which will aid in increasing

national output and attracting Investments along with technical and financial

support: this will see the ZSE recovering from post election loses to close the year at

198.77 Points to anchor at a FY 2013 return of 30%

� The most probably case given our assessment of unfolding political and economic

events is a result of a slow shift from Politics to Economics, which would see a

gradual but slow attraction of foreign participation in the Economy and the financial

markets, economic performance will be largely as predicted in the first half as no

fundamental changes would have taken effect, in which case the mainstream

Industrial Index would close at 165.00 points to close 2013 at FY return of 8%.

� Worst Case scenario would be product of unrelenting political apprehension and

uncertainty coupled with disentanglement from the International Investment

community, slow economic reform and resource mobilization, Fiscal revenue

underperformance and slow key sector reforms, stifled technical and financial

support from regional peers: this would see the ZSE reverse entirely all the gains of

H1 to close the year in the Red at 145.50 points, a FY 2013 loss of 5%.

Fig 6 -ZSE H2 and FY% Return Scenario

Source: FBC Securities

-11%-5.9%

-21.9% -31.1%

23% 30%

8%

-5%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Current Best case H2 close Probable Case H2

Close

Worst case H2 Close

ZSE H2 & FY % Return Scenarios

H2 2013 % change FY 2013 % change


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Sector

Beverages

Agro

Property


Market Cap FY 2013 US $bn: Scenario Analysis

Source: FBC Securities

Equities Strategy

� Accordingly we have developed a list of stocks to keep an eye on in

premised on the fundamentals of their business models which in our view appear

sustainable into the future. Justification of selected list is based on our belief that

the stocks are trading at either significant discounts to the value we envisage in

them in the future or the potential returns that could accrue from these stocks in

the ensuing period subject to their strategic business mandates.

Sector Outlook and Our Stock Picks

Sector Sector Analysis

Beverages While Per Capita consumption still trails the

regional averages, promises for improving

disposable incomes, position the sector for

better performance.

Agro- Processing There is still excess capacity within the

sector with Zimbabwe having been an agro

based economy, efforts to revive the sector

to improve production and efficiency

present positive growth opportunities for

players in the sector.

Property Infrastructure development gap creates

room for investment in the sector and

sustainable demand.

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

FY 2012 Current Best case FY 2013

August 2013

Market Cap FY 2013 US $bn: Scenario Analysis

Accordingly we have developed a list of stocks to keep an eye on in H2 and 2014

on the fundamentals of their business models which in our view appear

sustainable into the future. Justification of selected list is based on our belief that

rading at either significant discounts to the value we envisage in

them in the future or the potential returns that could accrue from these stocks in

the ensuing period subject to their strategic business mandates.

Stock Picks

Stock Picks

While Per Capita consumption still trails the

regional averages, promises for improving

disposable incomes, position the sector for

Delta

Afdis

There is still excess capacity within the

sector with Zimbabwe having been an agro-

based economy, efforts to revive the sector

to improve production and efficiency

present positive growth opportunities for

Hippo

Seed-Co

BAT

Natfoods

Dairibord

Infrastructure development gap creates

room for investment in the sector and

ZPI

Pearl

Masimba

Best case FY 2013 Probable Case FY

2013

Worst case FY

2013


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Cont’.............

Sector Sector Analysis Stock Picks

Conglomerate

Rebounding economic fundamentals

across key sectors present future

economic benefits for diversified

business portfolios as most key sectors

operate below full capacity.

TSL

Innscor

Meikles

ICT Improved infrastructure development

and investment to support a transition

from voice to data which has become

pivotal in consonant with technological

advancement. Econet has enough

capital to respond to market dynamics

and competition.

Econet

Mining Stabilisation of global commodity prices

aback cementing demand from

emerging economies opens

opportunities for the sector.

Encouraging resource management

policies coupled with capital investment

in the sector will play catalyst to

capacity utilisation recovery efforts .

Hwange

Rio Zim

Falgold

Manufacturing Manufacturing sector is poised for

growth citing adequate supply side

support from the agriculture and other

sectors, and sustainable demand from

local, regional and international

markets. The sector has good

infrastructure and with the necessary

capital support will achieve production

efficiencies and competitiveness while

excess capacity to absorb expansion

efforts exist.

Turnall

Zimplow

Retail Notwithstanding the firm possibility of

increased disposable incomes, the

current consumer base provides

sustainable demand. Adequate

capitalisation and resource mobilisation

will see players benefiting from

increasing local and regional demand.

Ok-Zim

Edgars

Tourism Stability in the macro-economic and

political landscape will see revenues in

the sector improving.

AfricanSun

Financial Services Sector vulnerabilities, recapitalisation

concerns and the effects of MoU remain

forces to reckon with.

FBC

CBZ


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