Since its January 4th debut on the ZSE this year, Old Mutual Limited's Exchange Traded Fund (ETF) has had an impressive run so far, presenting a good case for market interest in alternative financial investment instruments through formal & regulated channels.
Broadly speaking, the ETF tracks and mirrors trading performance of the ZSE’s “market heavies” or the top 10 listed counters by market capitalisation. Until its October 1st trading suspension, Cassava Smartech had an active role in the ETF and made up 11.98% of the fund.
Considering its low trading entry point of 400 cents per share (as of 11 October 2021), the ETF is an affordable basket of stocks with significant value as measured by market capitalisation and (in the context of 2021 activity on the ZSE), a high likelihood of not only bringing returns on investment but of outperforming inflation while doing so.
Money (over) supply
Reserve Bank of Zimbabwe (RBZ) data indicates a disproportionate and diverging relationship between Zimbabwe’s money supply levels and resumption of productive and manufacturing sector output. Year-to-date, reserve money is up 50% at ZWL 28 billion, with indications of further growth in the remaining months of 2021 as the State plans to support the country’s agriculture sector.
ZIMSTAT data highlights an upsurge in both monthly and annual inflation figures from 4.2% and 50.24% up to 4.7% and 51.55% respectively. Additionally, the RBZ recently made an upward revision of its headline inflation target from a range of 22%-35% to 36%-53% by year-end. Equity Axis Research however pins the figures at 8% for monthly inflation and 64% for its annual counterpart.
Room for investment
Factoring in the local market’s inflation expectations as indicated by diverging centralised and parallel currency market exchange rates as well as the accelerated recovery of operating environments post Covid-19 lockdowns, local financial markets seem ripe for the introduction a new composite counter the investment community can hedge inflation with – a fast moving consumer good (FMCG) ETF.
An FMCG ETF would bank on the assurance of resilient demand of consumer goods based on their necessity and demand frequency. The retail space was relatively subdued during lockdowns due to shortened operating hours, but the easing of lockdown measures has initiated business recoveries across the sector. Potential target counters for this ETF would be Simbisa Brands, OK Zimbabwe, National Foods, MedTech, Innscor, Delta Corporation, Dairibord and the recently resurrected CFI Holdings. Each stock represents a wide range of products in terms of type and value, supporting the views of an FMCG ETF’s collective nature and diversified ability to sail through business cycle fluctuations. Additionally, the regional footprints of a counter like Simbisa would have the effect of balancing or offsetting poor or slow domestic activity and would supplement it if the opposite set of conditions.
Determining motives for stock weight in the collective counter may vary.
Balanced: an equal spread where each counter represents 12.5% of the total market capitalisation of the ETF;
Weighted-Average: leaning towards the ZSE’s established metrics, a weighted-average approach would favour higher value companies in terms of ETF composition, resulting in more Innscor shares than those from MedTech;
Biased: with consideration of 2021 ZSE trading performance, weighting could also take an approach of better year-to-date gainers as indicators of trading performance potential assuming the operating environment remains constant. In this case, CFI would be underrepresented because of its relatively dormant trading history.
Investment appetite in formal money markets continues to be fuelled by economic uncertainties. Holding on to ZWL bank balances is an almost certain value erosion risk.
Alternatively, conversion of funds held to a foreign currency such as the United States Dollar comes with its own challenges, chief among them the long arm of the law given the RBZ’s recent combative approach to currency market activity. Informal attempts to minimise currency risks often come with steep costs because of the high range of market-quoted exchange rates in parallel markets.
As a commercial entity, bidding for funds on the RBZ’s weekly foreign currency platform is, despite having a more favourable exchange rate, a Gamble. Between bid rejection and delayed allotment of requested funds, reception of a foreign currency to safeguard money’s value is discouragingly difficult. At consumer level, the much-publicised Bureau de Change route is already rife with inconsistency and unsatisfied demand.
Addition of a new money market investment avenue is therefore a timely move. Unlike buying into individual counters where financial literacy comes in handy, a consumer-goods based stock would be a relatively easier counter to follow.
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