US tapering may hit ZSE

HARARE - The on-going tapering in the United States is likely to have impact on Zimbabwe’s economy, with reduced activity on the country’s stock market, according to Imara Edwards (Imara).

In its 2014 outlook for Zimbabwe’s equities market, the investments advisory firm said the tapering will impact southern African nation’s economy in two ways.

“Firstly, there is the inescapable fact that there will be reduced portfolio inflows on the ZSE and secondly the reduction in quantitative easing (QE) will make the US dollar appreciate against other currencies which will further erode the local manufacturing competitiveness,” said Imara at their seventh annual investors’ conference last week.

Tapering is a gradual winding down of central bank activities used to improve the conditions for economic growth.

Tapering activities are primarily aimed at interest rates and investor expectations of what those rates will be in the future.

These can include conventional central bank activities, such as adjusting the discount rate or reserve requirements, or more unconventional ones, such as quantitative easing.

Imara noted that assuming a slowdown in Gross Domestic Product (GDP) growth in 2014 and a deflationary environment in early 2015, only companies with strong cash generating capacity and low gearing are expected to do well.

“With demand expected to weaken, liquidity to tighten, currency to appreciate and international interest rates to rise it will be heinous to invest in a highly leveraged company because of the prospect of financial distress is higher,” it said.

Listed companies in telecoms, brewers, agro-based manufacturers and selected defensive fast moving consumer goods (FMCG) will do relatively well in a defensive strategy geared towards value preservation compared to growth.

“Our view is that blue chip counters will offer defensive qualities that can limit the downward risk of equity portfolios, especially those in the FMCG sector, food retailers and selected agro-based producers,” Imara said.

It further added that companies that are dominant in their respective industries will offer better returns as they are able to pass on the increased cost of doing business in a slow growth economic environment.

Already, indications on the ground point towards a very difficult year from both the fiscal performance and private sector participation.

“Unfortunately we expect more companies to file for judicial management and some will be liquidated as the inescapable effects of deflation bite,” Imara said.

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