The problem for investors now is to find whether you are getting value from ballooning stock prices, or it’s just a false impression on performance.
As of Wednesday, the Zimbabwe Stock Exchange’s main Industrials Index was up 75,82 percent year-to-date, while the ZSE Top 10 was up 84,43 percent year-to-date. By another explanation, the ZSE is currently trading at record levels, having breached the previous one of 534,12 reached in November 2017.
This brings the question, is there still value in ZSE stocks?
Analysts are divided on this one with some saying you are still losing value even if you buy stocks while others believe stocks are actually undervalued if you are buying using RTGS balances, which are now being significantly discounted against US$.
Using traditional methods such as forward price earnings ratios, or using the market capitalisation to GDP ratio points to the fact that the ZSE is overbought especially compared to other regional markets, said one market analyst.
But just like economists who usually see things differently, analysts are also seeing things differently with regards valuations on the ZSE.
To some analysts, buying stocks is still the right thing to do because “we are using near RTGS money to purchase assets.”
The argument is that as it stands the RTGS currency stands to be of less value so there is really no way of valuing something without an accurate currency peg.
The ZSE is probably still undervalued in RTGS terms, said another analyst with an asset management firm, unfortunately not allowed to speak to the press, but he argues that given what is happening on the currency front, stocks are still cheap.
For one US dollar, one is probably asked to transfer between $3,30 and $4,59 (the rate keeps moving) meaning the real price of Delta trading at $3,24 on the ZSE is probably US 98 cents.
Historically for Delta, 98 cents points to an undervalued stock, it was valued there before it made more sales and increased production as is the case now.
The analysts, however, argue that the 1:3.30 ratio is actually understated and should be at least 1:10 which means the current price for Delta shares is 30 cents.
He says a 1:3.30 ratio makes Zimbabwe’s bond notes the strongest regional currency against the greenback. This is a real pause, the South African Rand is 1:14.5 to the dollar, Botswana Pula 1:10.64 and having the US$ trading at a 1:3.3 ratio to the bond note, late alone the official 1:1 ratio, is probably stretching it.
The sellers are the losers
Another argument that has been put forward is that if we are discounting currency, doesn’t it follow that we also have to discount the kind of earnings or cash flows that a company is generating.
Delta is generating, mostly RTGS balances, does this then mean it should not trade at US 98 cents but should be discounted further, meaning its currently overvalued.
It’s neither here nor there for the stock market because we are using near RTGS money to purchase assets, argued another analyst.
Given our current situation, revenue, cash flows and earnings means nothing and what investors should be going after are the underlying assets, said the analyst.
Just as we are moving from holding at RTGS balances, we must also disregard valuations that look at revenue, cash or earnings performance, but focus on book value or tangible and intangible assets.
If the currency is nearly valueless, then the one buying an entity with strong assets, brands, patents, business model, is gaining while the sellers are the losers.
But then not all ZSE stocks have these attributes, maybe for those, they might be overbought.