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May a bad month for equity investors

MAY turned out to be a bad month for equity market investors across the globe. In the US the Dow Jones Industrial Average, the NASDAQ Composite and S&P 500, suffered losses of 9, 2%, 8, 3% and 8, 2%, respectively.

For the Dow Jones, it was the worst May since 1940. The FTSE 100 in London and the Nikkei 225 in Japan were not spared either as they lost 6.6% and 11.7%, respectively. The debt web in Europe was the main reason for the sluggish performance with economists anticipating a slow recovery in the global economy. There was short-lived relief when a US$1 trillion aid package was unveiled by the EU and the IMF at the beginning of the month. However, as more problems emerged in the euro zone the excitement fizzled out. Spain’s government debt rating was downgraded to a lower investment grade by Fitch while other European countries are also under threats of downgrade. The worst hit so far is Greece whose sovereign bonds were deemed junk by rating agencies.

Performance on the Zimbabwe Stock Exchange mirrored that of international markets albeit for different reasons. The benchmark industrial index lost 6, 91% during the month with the value lost in the year to date at 14, 86%. Market capitalization shed 6, 2% with the cumulative loss since December 31 2009 at 13, and 1%.

Sentiment remains negative as most foreign funds continue to avoid the ZSE as the Indigenization and Economic Empowerment regulations still remain a perceived impediment to potential investments. The situation deteriorated further on the 27th of May when the government banned exports of diamonds resulting in a sell-off of some heavy-weight counters.

This decision also further heightened risk aversion to the country among investors. Doing Business 2010 ranked Zimbabwe at 155th out of 183 countries in terms of having a conducive government regulatory framework to doing business. In other words the country is among the worst for business being in the same bracket with such countries as Afghanistan, Venezuela, Democratic Republic of Congo and Burundi, to name but four.

ZSE Mining counters were also down easing 5, 13% to end the month at 159, 28 points dragged down by losses in Hwange and Bindura that shed 11, 5% and 12, and 5%, respectively. Rio Zim managed to recoup losses suffered when the diamond ban was imposed to close the month unchanged at US 265 cents whilst Falgold gained 9.8% to close the month at US4.5 cents.

Rio Zim is currently seeking to raise US$40million through a rights issue to increase production. The mining sector, like all others in the economy, is beset with shareholding uncertainty because of the recently promulgated indigenization policy. Also weighing down development is the pending amendment to the Mines and Minerals Act. Investors want to know the final positions on these issues before injecting capital into the operations.

Mid and small caps were the best performers again this month highlighting the absence of institutional investors who usually prefer heavily capitalized companies. CFX was the top gainer with a jump of 50% followed by Hunyani that gained 49.3%. Fidelity, Willdale and Cairns completed the top five movers with gains between 40% and 25%. The worst performers were PGI, Afsun, Caps, Gulliver and Pioneer with losses ranging from 30, 1% to 40%, respectively.

The corporate front was also listless. Financial results published over the month were rather subdued reflecting stagnation in the economy. The only exception was Delta Beverages whose sales volume grew by 99, 7% albeit from low levels.

Capacity utilization averaged 65% for the group and 91% for the flagship lager business. Profit after tax came in at US$39, 6 million off a turnover of US$330, 8 million for the full year to 31 March 2010. The company also outlined an impressive roadmap in which it plans to spend US$160 million on capital expenditure over the next three years. The money will be spent on installing a new pet line, new lager line for Bulawayo, replacement of delivery vehicles as well as improving packaging and IT equipment.

Art and CFI on the other hand made losses after tax of US$2, 8 million and US$268 150, respectively, in the six months to 31 March 2010. The former blames the poor performance on discontinued operations at Mutare Board and Paper Mills that contributed a loss of US$1, 3 million. CFI on the other hand is attributing its loss to stiff competition from imports, high finance charges and the high cost and inconsistent supply of utilities.

The outlook depends largely on the outcome of the reported redrawing of the indigenisation regulations. Local buying is not enough to sustain the selling by local investors. The talk of another election in the country as early as next year could worsen the political risk and this would delay the return of foreign capital.  Only the return of foreign investors will save the ZSE from a possible further collapse.

The performance of the Zimbabwe Stock Exchange against other major indices during the month of May is captured below;

Kumbirai Makwembere

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