Zimbabwe 2017 Review and 2018 Outlook

Zimbabwe 2017 Review and 2018 Outlook
Published: 26 January 2018
Zimbabwe entered a new chapter in November 2017, following the resignation of Robert Mugabe, and his replacement with Emmerson Mnangagwa. The President in his inaugural speech pledged to 'hit the ground running' and promised to hold fresh elections in 2018. He outlined a broad vision for restoring economic and financial stability and touted a 'new economic order'.

The new economic order is set to address fiscal imbalances and financial sector vulnerabilities; public enterprises and local authorities' reform; improving the investment environment; dealing with corruption in the economy; reengagement with the international community; stimulating production and exports and creating jobs.
The country appears to be at a crossroad, although the economic downturn that was experienced since 2013 appears to be reversing and Zimbabwe's economy is showing some signs of a recovery.

Favourable rains received in the 2016/17 season boosted growth of the agricultural sector in 2017 raising per capita output. The GDP growth rate is expected at 3.7% in 2017 against an initial target of 1.7% and up from 0.7% in 2016.However, the country still faces complex fiscal and macroeconomic imbalances despite strong fundamentals for economic growth. According to the MOF, the economy is projected to grow by 4.5% in 2018 riding on the continued recovery of the agricultural sector. Nonetheless, well-designed policies will be vital to accelerate growth and sustainability.

On the Zimbabwe Stock Exchange, foreign outflows increased significantly although the market reached an all-time high (post dollarisation), driven by greater participation of domestic investors mainly on negative sentiments about the local economy. The depreciating RTGs, inflationary pressures and shortage of viable alternative investments helped fuel the gains. 

The ZSE market cap peaked at USD 15.2bn just before the political intervention by the military on 14 November 2017. At which point the market had gained 269.6% on a YTD basis and the Industrial Index was at 534.13 points. The market then eased as sentiment changed and the gain in 2017 ended at 130.4% for the Industrial Index while the Mining Index put on 143.4%. 
Given the muddy economic outlook we believe that volatility on the ZSE will likely stay high. Investors should note that the volatility in valuations normally creates buying opportunities and we recommend picking up the blue chips on weakness. Fewer stocks have an appealing risk/return profile, even under the most optimistic assumptions on growth in revenues and margins. With market earnings multiple at a 119.0% premium to 9-year averages, market valuations are fairly pricey, in our view.

In our view, the ZSE still carries good long-term growth potential given the economy's prospects of a recovery if the necessary reforms are undertaken. For our top picks, we are not sector specific and recommend investors adopt a bottom-up strategy.

In our view, blue chip stocks will offer defensive qualities that can limit the downward risk of equity portfolios. Our picks tend to be monopolistic, lowly geared, well managed businesses with strong cash generation abilities and solid balance sheets. These include companies such as Afdis, BATZ, Delta, Econet, Hippo, Innscor, Old Mutual Plc, Padenga, PPC and Seed Co.

- Imara Zim Research
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