It’s been a remarkable month in Zimbabwe.
After 37 years that saw the southern African nation deteriorate from one of the continent’s most prosperous to one of its most destitute, President Robert Mugabe resigned from office on November 21 following a military takeover precipitated by his sacking of Vice President Emmerson Mnangagwa.
The dramatic turn of events has understandably raised hopes of much-needed political and economic reforms. And I’m already getting questions from readers who are keen to figure out how best to invest in the country.
So, is it time to buy Zimbabwean stocks?
In my view, the answer is no. But it’s most certainly time to familiarize yourself with the market.
Here’s why investors should stay on the sidelines for now.
- The new administration is not certain to implement needed political and economic reforms.
- After a huge run-up this year, the Zimbabwe Stock Exchange (ZSE) isn’t exactly cheap.
True, it’s hard to imagine that Zimbabweans will be any worse off after Mugabe’s departure. The past two decades have been nothing short of ruinous.
But it’s important to remember that Mnangagwa, his likely successor, has a deeply checkered past. Thousands of civilians were massacred in Matebeleland during his tenure as security minister in the 1980s. He was also implicated in the invasions of white-owned farms and in the brutal crackdown on supporters of the Movement for Democratic Change (MDC).
Even if Mnangagwa, while not a saint, proves to be a pragmatist and steers Zimbabwe toward economic recovery, Zimbabwean stocks are still tremendously overpriced.
The ZSE’s main index has posted a 128% gain since the start of this year. But the surge isn’t a result of improved earnings or a newly bullish outlook. Quite the contrary. With dollars increasingly scarce, local investors were worried about the potential for a return to the bad old days of hyperinflation and raced to invest in stocks as a way to protect the value of their savings.
When the military took over the government on November 14, inflation fears began to subside. And stock prices plunged. The ZSE’s Industrial Index has plummeted 38% since that date. And, as I write, it remains in near free-fall. Yet the market’s average price-to-earnings ratio remains at an exceedingly high 30.0. Thus, the prudent course is to wait for the market to find a floor.
This could take a matter of days, weeks, or months. It’s impossible to say with certainty.
What to Watch For
There are two things that would indicate that Zimbabwe’s stock valuations are migrating from highly speculative to long-term value territory:
- The ZSE Industrial Index falling from its current level of 329.6 to somewhere in the low 200s (ideally lower); and
- An official announcement that elections will proceed next year as scheduled. If this doesn’t happen, the new administration’s legitimacy will remain in question, as will its capacity to put the country on the track to economic recovery.
Three Stocks for Your Watchlist
If both of the above conditions are met, I believe there are a few companies that stand a good chance of yielding market-beating returns over the long-term.
(Current Price: $0.20; P/E Ratio: 14.3; Dividend Yield: 2.5%)
Axia operates Zimbabwe’s popular TV Sales & Home stores, which sell a wide range of furniture, electronics, and appliances. It also runs a trucking and warehousing business, and Transerv, which distributes spare auto parts.
The company’s earnings have been remarkably resilient in recent years thanks to inflation-wary consumers spending cash on tangible goods. The business will likely find it easier to import inventory in a post-Mugabe Zimbabwe.
(Current Price: $0.20; P/E Ratio: 27.0; Dividend Yield: 2.3%)
OK Zimbabwe operates one of the nation’s largest grocery chains. Similar to Axia, it should find it much easier to restock its warehouses with imported goods under the new regime and should also benefit from what is forecast to be a good agricultural harvest this year, which should put a bit more spending money in consumers’ pockets.
(Current Price: $0.86; P/E Ratio: 23.2; Dividend Yield: 1.7%)
Zimbabwe’s dominant telecommunications provider, Econet boasts a 49.4% share of the nation’s mobile telephone market. Similar to Kenya’s Safaricom, it is a pioneer in the field mobile payments and insurance. Mugabe’s departure raises the prospect of increased availability of foreign exchange, which should allow companies like Econet to more rapidly expand and enhance their services.
How to Invest in Zimbabwe
If you don’t already have a stockbroker in Zimbabwe, the good folks at IH Securities will be happy to help you open a trading account and to register with the Central Securities Depository.
You might also find the following article helpful:
Do you think Zimbabwean stocks are a bargain in these early post-Mugabe days? Let’s hear your thoughts in the comments.