Market players lean towards defensive stocks
Market watchers are leaning towards defensive stocks on both the Zimbabwe Stock Exchange (ZSE) and Victoria Falls Stock Exchange (VFEX) as inflationary pressures and currency volatility weigh on 2024 equities investments.
Counters with strong dividend policies, exporters and producers of consumer staples are among favourites for investors as well as those with a strong cash generating capacity.
Market watchers opine that while at current lows, there remain strong upside on the primary bourse the ZSE off a low base, the market is still susceptible to the economic headwinds obtaining.
Inflationary pressures, rate volatility and currency volatility will weigh on returns not only for listed counters but across industries.
“Rate volatility will remain a downside risk to real returns,” said IH securities in an Equity Strategy 2024 report.
“The uncertainty around money supply developments in 2024 propels us to lean more towards defensive stocks that have strong dividend policies in case capital gains remain subdued.
“Based on counters under the IH universe, median dividend yield currently stands at 3 percent. Presenting higher dividend yields are Axia (9,2 percent), Delta (7,5 percent), and Innscor (6,2 percent),” said the brokerage firm.
For a company like Delta, its continued capital expenditure campaign has seen the group spending US$46 million during the first half of FY24 on capacity upgrades. Delta has commissioned three new plants (lager, sparkling beverage and sorghum beer segments) to boost productivity and address mismatch between supply and demand.
The beverages giant is expected to see volumes remaining strong on the back of increased capacity and the group’s focus on expansion of route to market to also capture the growing informal market.
During the first half of its financial year 2024, Delta’s proportion of foreign currency sales was over 80 percent signalling the group’s capacity to withstand local currency headwinds, which is another added advantage for the group and other firms with capacity to generate foreign currency.
“In the increasingly difficult search for value, we continue to lean towards well established monopolies, with significantly dollarized earnings, defendable margins and high USD dividend yields in the absence of realisable capital gains,” said IH Securities.
However, the downside risk to consumer demand might be in the form of reduced bottom of the pyramid liquidity owing to the negative impact of El Nino conditions on the agricultural sector and moderating hard commodity prices on international markets.
Elsewhere, the VFEX, being dollar-denominated, is likely to better preserve capital in the current inflationary environment. Notably from the VFEX offerings, the Karo bond has a coupon rate of 9,5 percent, availing a fixed-income asset class for diversification.
For Innscor, its focus on product diversification and capacity upgrades have seen the group deploying capital expenditure of US$125 million in the past two financial years with a further US$50 million being committed for FY24.
“We therefore expect manufacturing efficiencies to grow with these new investments. The group’s pricing dynamics are expected to benefit from the easing of wheat prices, thereby positively impacting volumes in the group’s mill-bake segment: as at 1Q24, aggregate volumes at National Foods were 17 percent ahead of the prior comparative quarter.
“We expect Innscor to remain profitable to FY24 with a forecasted Net Income of US$48,9 million,” said IH Securities.-businessweekly
