The year 2022 has been a bruising one for equity markets, both locally and offshore.
There’s been no place to hide within the broader markets. Equities are down across the board, no matter what currency you measure it in, there has been a lot of money lost by investors. In US dollar terms, the ZSE is down approximately 85 percent.
What is driving stocks down is not necessarily about the underlying fundamentals for profits and for earnings growth, which are still relatively strong for selected counters.
The current sell-off is largely caused by institutional investors looking for the local currency. Uncertainty around currency has forced institutional investors to liquidate listed shares than liquidate US dollar holdings.
High-interest rates have also made borrowing to meet obligations expensive and unattractive. But with Zimbabwe dollar obligations cash had to come from somewhere and the stock market has been the victim.
That is not to say it’s all rosy for listed corporates.
Executives are worried about inflation. Inflation erodes value. With inflation a dollar earned today is less than a dollar earned yesterday, a month, or a year ago. Inflation erodes asset values. Listed firms are reporting hyperinflation-adjusted losses. For BAT Zimbabwe it was a $2,2 billion monetary loss.
Executives are worried by high-interest rates, and higher rates typically lead to high cost of debts and also push up prices for the constrained consumer. The result is subdued aggregate demand.
There is also the issue of a depreciating currency. BAT Zimbabwe booked through a $680 million exchange loss.
While businesses have used value preservation strategies such as indexing prices to the US dollar and using the forward pricing strategy, exchange rate depreciation has been moving much faster. As a result, though volumes and revenue might be growing, the value created might be lower than in the past. That affects stock valuations.
It makes stocks unattractive in the eyes of some investors. So we’ve had a derating of stocks and these have been the key drivers behind the stock market weakness.
Most stocks now look very cheap, but not all of them are good investments. Some of them are value traps. Their fundamentals are in line with the current valuations. There are however some stocks that are now at a huge discount. Its a bargain hunter’s paradise. Even as bad as things are, good businesses will still be able to recover and grow.
Investors would be best served if they focus on businesses that can navigate the macro environment better than others. These are companies with strong competitive advantages and dominant market shares. Consumer staples come into play. Exporting firms won’t be a bad bet. Think of companies that, even in these tough times, have been sharing cash generated with shareholders in form of dividends or share buybacks.
Another key consideration is where the economy is heading. Earlier we spoke about how inflation has had an impact on asset values, on the ability to create value. However, going forward, while high inflation levels are here for longer, the trend is heading south. Inflation seems to be slowing on a month-on-month basis. And that’s a good sign. It means a dollar earned today will not be that much eroded. As inflation moderates, it will take the pressure off the high-interest rate regime. In fact, authorities have already eased the push toward higher interest rates.
So stock valuation multiples no longer need to compress.
Currency depreciation has slowed down significantly on the parallel market. The local dollar has even firmed. Officially the exchange rate is still weakening but towards removing the premium and distortions that characterised the environment. Its obviously early days, but stability is welcome. We are most likely in the bottom-up period.
The most important thing for investors is to look for companies that could grow volumes and are profitable amid the volatile, uncertain, complex, and ambiguous environment. That growth and value creation will offset whatever downside that is still to come.