ZSE | IH Zimbabwe 2023 Year-to-Date Equity Strategy

Global Economic Growth is projected to slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024. Disruptions in energy and food markets due to geopolitical tensions, long-term effects of the COVID-19 pandemic, extreme weather events, withdrawal of fiscal support amid high debt and tightening of global monetary conditions to combat inflation have all constrained GDP growth and will likely continue to do so for the next two years.

 

Inflation & Interest Rates: Central banks across the globe have maintained tight monetary policies in a bid to curb the runaway inflation which reached decade-highs in 2022. In addition to several rake hikes throughout the year, the Bank of Canada, Bank of England, European Central Bank and Federal Reserve all raised rates in July, with the ECB and Bank of England effecting subsequent hikes. Currently, the US Fed rate is 5.5%, whilst the ECB and Bank of England rates are 4% and 5.25%, respectively. Inflation has therefore been subsiding due to these measures. According to IMF forecasts, global inflation will decline steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024, with the expectation that inflation will begin to return to target in 2026.

 

Global Markets: Despite rallying during the first half of the year, global equities markets fell during the third quarter. The markets initially benefitted from an AI-driven tech surge and the recovery of the cryptomarkets. However, increased concerns over the effects of interest rate hikes on economic growth coupled with the trickle-down effects of these hikes on consumer disposable income have heavily weighed on equities during the second half. Commodities markets tapered 7.5% between February and August 2023 on the back of a 15.7% decline in base metals and 36% downturn in natural gas. Meanwhile, crude oil prices increased by 4.4% during the same period despite lower-than expected demand in China and tight global monetary policies. It is expected that increased tensions in the Middle East will continue to drive oil prices up for the remainder of the year.

 

IH Outlook: It is expected that there will be little additional monetary policy tightening globally as many countries are nearing the peak of their tightening cycles. We however expect that central banks will maintain high interest rates into 2024 to ensure disinflation holds, with most economies reaching target inflation by 2026 on average. The World Meteorological Organization has warned of El Nino conditions for the remnant of 2023, which could point to production downside for drought-prone countries in Sub-Saharan Africa like Zimbabwe and significantly impact yields. This is a huge risk as the local agricultural sector remains a key driver of national GDP. In the short to medium term, we anticipate continued use of the US$ in the local market as the local currency has depreciated significantly YTD. We believe the ZSE remains undervalued, providing for buying opportunities whilst we forecast increased liquidity on the VFEX in light of increasingly dollarized premiums to institutional investors.

 

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