Before the year closes, it’s always important to have a look at how the stock exchange performed. For some of us who have invested in the Lusaka Securities Exchange (LuSE), the performance of the All Share Index is a clear indicator of how our overall stock portfolio performed over the year.
But first, having a look at international stock markets is also important as it gives a general feel of how the overall global economy has performed to an extent. As at the time of writing this article (28 December 2018), on a year to date basis, the DOW was down 6.39%. The NASDAQ down 4.69%. The S&P 500 down 6.91%. The FTSE 100 down 14.35%. The CAC 40 down 13.44%. All of these are some of the biggest stock exchanges that dwarf our local bourse.
The all share index provides a weighted average for a select group of companies on a particular stock exchange. That is why, although the index may reveal a slump in overall performance, outliers exist in companies that performed well through increases in earnings.
For our own stock exchange, the LuSE All Share index lost 1.49% in market capitalisation. The Gross Domestic Product (the monetary measure of the market value of all the final goods and services produced in a period of time) for Zambia in 2017 was valued at US$ 25.81 billion by the World Bank. With the market capitalization (market cap.) of the LuSE closing the year at approximately US$ 2.178 billion (with Shoprite Holding the lion’s share), the countries market cap to GDP is approximately 8.43%. Stock Market theory indicates that if market cap of a country is less that 40%, it means that that particular stock exchange is undervalued.
A closer look at the year-to-date price changes of all 22 listed companies on LuSE showed that nine (9) companies, which is 41% of the exchange, had losses in their share price. The companies which experienced losses (includes the magnitude) during the year included AEL Zambia (1.51%), Bata (10.44%), Investrust Bank (11.11%), Lafarge (22.08%), Madison Financial (0.32)%, National Breweries (1.60%), Standard Chartered (5.05%), ZCCM IH (25%) and Zanaco (13.4%).
The biggest contributors to the downward spiral of the LASI were Lafarge and ZCCM IH. Investors in these companies will be deeply concerned by the loss in value. Conversely, both companies enjoyed positive performance with improved year on year earnings. The former saw the exit of its CEO in December and the latter completed the year by closing of the financing arrangements for its upcoming cement plant in Ndola.
An undervalued stock exchanged is indicative of symptoms of liquidity challenges. The ubiquitous discourse around the under performance of the exchange in 2018 was around the lack of movement in the share price of stock. However, a closure look actually reveals that there was actually significant moment over the aggregated shares. But, the size and frequency of the trades was indicative of liquidity challenges. This can also be partly explained by the amount of interest towards other securities such as Bonds and Treasury Bills that has offered fixed income to investors.
For 2019, Financial Insight believes that an upward surge will only be possibly if the liquidity dilemma is addressed. In addition, all eyes will be on the Central Bank when it makes its first move for 2019 in February at their Monetary Policy Committee event. With signals from the central bank indicating that they would not flinch if inflation indicators continue to put pressure on MPC, we envision a carryover of the symptoms local bourse has experienced. That is why when IDC made the announcement that they would be looking at having more of the State Owned Enterprises (SOE) under their wing list on the LuSE, it was a welcome development that may also hold the key to improving our market capitalisation against GDP. Listings had the inadvertent effect of attracting off shore investors which one may actually consider as export income coming into the country.