Zimbabwe’s big corporates have hit hard times. Profits are hard to come by, a clear sign that the high gearing levels will persist much longer than desirable. About 36 percent of the listed companies made losses last year, and this year there is no evidence that the situation is going to be much better. In any case, the outlook for this year is much worse than was much anticipated. Cumulative corporate losses have surpassed $710 million since 2009, a frightening figure considering the very low GDP of about $7 billion and the fact that these losses came from companies that contribute less than 10 % to GDP. This revelation should be a clear sign to policy makers that the growth path of this country cannot be pinned on the big corporates alone. The German and Chinese growth models are now an envy of most countries the world over, and the Zimbabwe government, coming from hyper-inflation, needs to consider the Ministry of Small to Medium Scale Enterprises as the pivot from which sustainable long term growth of economy will emanate from.
A recent report from China reveals that 90% of the private sector businesses that contribute 70% of employment are family owned enterprises. They further contribute 60% to GDP growth and about 50% to tax revenues. The German Mittelstand industrial model, based on small SMES, have provided anchor to the German economic model and today German is one of the strongest economies in the troubled Eurozone. The case for the small companies to champion growth is easy to follow. The SMEs are more efficient in terms of operational structures and can produce, with minimal equipment, goods at lower per unit costs than the big behemoths.
This past week I visited over 10 SMEs in Chinese light and heavy duty equipment manufacturing companies in the Shanghai and Haining industrial areas in China. I have come to understand the most important dynamic that is at the centre of successful SMEs – thus the ability and flexibility to operate efficiently with minimal multi-skilled labour force and of course optimal investment in equipment. Eight of these companies, with sales averaging around $60,000 per month each, are all export oriented and have never supplied their domestic market notwithstanding operating in very humble premises and committed multi-skilled labour force.
Because of the fierce competition that exists within China itself, most companies thrive to provide goods and services at the most competitive price in order to remain in business. China, which exported good worth $365 billion to the USA in 2010, attributes its success, to a large extent, on the resilient small companies that have not only managed to have an influential depressive role on the national wage rate, but have equally provided the most competition to the big established companies in China. This is the competition that has seen Chinese companies reaching out to the global market for survival and China has since surpassed Germany as the world largest exporter. For the first quarter of 2012, Chinese exports of goods stood at $430 billion.
Coming back to our domestic investment markets, it is the end of the first quarter and about 46 out of the 76 companies listed on the Zimbabwe stock exchange are trading below their 01 January 2012 prices. Considering that about 36% of the companies listed on the Zimbabwe stock exchange made losses as of 31 December 2011, it therefore becomes comprehensible why the market sentiment is very negative about the prospects of the Zimbabwe Stock Exchange in generating value for investors. There are, of-course, pockets of optimism in the economy but generally when more than a third of listed companies fail to generate positive earnings in an economy that is bullish about recovery, then it is a good cause for concern for investors.
Notwithstanding that most of the companies are trading below their historical P/E ratios and at about a third of the average P/E ratios of their regional counterparts, the bearish trends are expected to characterise the Zimbabwe Stock Market for the greater part of 2012. The current government of national unity in Zimbabwe has differed over a number of key policy aspects, with the discord growing louder as the talk of elections this year gets momentum. The stock market is the most timid of all investment markets. Its fortunes swing on the extremes of the information continuum. It has the most efficient and equally as well, the most irrational way of transmitting information into pricing of stocks.
The bickering policy makers in the government of national unity have been sending conflicting signals over the management of the economy. With the talk of elections gathering momentum, the differences are going to be getting sharper and to some extent, will be deliberately over-exaggerated as policy makers wear their political hats and toe party lines religiously in order to retain their ministerial and more importantly, party positions. The Zimbabwe stock market performance for 2012 becomes more sentiment driven under such circumstances and will therefore most likely remain bearish.
The money market average yields during the first quarter of the year, around 15% per annum, are most likely to remain attractive for the greater part of the year. From the market data coming through, banks are most likely to be more liquid this year than they were in 2011 considering that banks controlling about 34% of the loanable funds in the market have indicated that they are engaging in massive slowdown in lending. This move should, under normal circumstances, leave more liquid assets on bank balance sheets and may reduce the banks’ appetite to engage in aggressive funding of short positions that had been keeping the money market in Zimbabwe very lucrative for the past two years as banks competed for scarce liquidity. Notwithstanding the above that points to more liquidity likely to accumulate in the market, the money market is forecast to generally remain in deficit, which deficit, when compared to the aggregate demands of industry, will likely sustain yields of above 10% per annum for investors on the money market.
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