The world seems to be precariously balanced on the edge, with instability lurking in almost every region of the globe.
There is the de facto Cold War between Trump and Putin, uncertainty around Brexit leading UK nationals to hoard canned food items and the escalating trade and aid conflict between Washington and Beijing. Africa is no different, as we see from neighbours Zimbabwe and further north, the Democratic Republic of Congo.
With all this uncertainty, it is only natural that investors would question investment choices. Since 2011, Ecsponent followed an investment philosophy that fuses traditional, proven investment principles with progressive, creative thinking that champions innovation and generates returns. We are able to do this, regardless of market or political conditions, because we are agile and can adapt fast to market turbulence. Additionally, we focus only on opportunities aligned to our strategy, where sound governance is the norm, and in areas we understand well enough to mitigate risk effectively.
Be careful when you blindly follow the masses.
Consider the fallout investors in crypto currencies like Bitcoin faced in 2017. By Christmas of that year, grannies, gardeners and car park attendants were all bragging about their Bitcoin investment profits. Their celebrations were mostly premature, with most of them still out of pocket a year later.
As this example illustrates, following the masses is never a good investment principle. Instead, it is advisable to buy and sell contrary to prevailing market sentiments.
Look beyond the news headlines to understand risks and opportunities
The media fulfils an important role to inform their audiences and have been instrumental in exposing important societal atrocities and initiating social change. However, news headlines alone cannot determine where opportunities may be present in specific sectors or countries.
If we look at Zimbabwe, there is no denying that the country is facing tremendous challenges and social uprising is rife and the reported human rights violations unacceptable. Yet, looking at the situation form a pure investment perspective, social uprising is not unique to the country and even developed democracies like France are experiencing pressure from citizens. It is also important to consider that the new Zimbabwean leadership inherited a financial system on the verge of collapse. It will take time to repair the damage caused by years of mismanagement and neglect.
Zimbabwe’s economy presents myriad opportunities amid the turmoil and requires a balanced investment view. The country is facing severe cash and foreign exchange shortages, a high and unsustainable debt-to-GDP ratio and a high fiscal deficit which continue to constrict economic activity. In addition, the persistent shortage of essential goods, including fuel and consumer goods, remain the major headwinds for any meaningful economic recovery.
On the positive side, the fiscal deficit was an estimated 10.7% of GDP in 2018, compared with 12.5% of GDP in 2017. This deficit was driven mainly by election- related spending, civil servant salary increases, and transfers to the agricultural sector in 2018 was financed mainly through domestic borrowing. That has resulted in external debt reducing from 53.8% in 2017 to an estimated 45.3% of GDP in 2018.
Furthermore, Zimbabwe has one of the most youthful populations, with 36% of the population being between the ages of 15 and 34. Given that the labour force is comparatively skilled, and the public infrastructure is functioning, Zimbabwe has an opportunity to join existing supply chains in Africa through the Continental Free Trade Area.
On the brink of growth
These indicators and expectations are just some of the drivers behind the company’s decision to invest in Zimbabwe. In addition, there is also opportunities in the areas of business where Ecsponent has significant experience.
As an investor, the Group finds and invests in markets or businesses that are in a growth phase, or on the brink of such a phase. One way a country can unlock growth, is to stimulate the flow of funds through trade. The Zimbabwean government has adopted a three-pronged strategy based on agriculture, ecotourism and special economic zones, anchored on enhanced economic and political governance, to promote growth in the country. The government is also making strides in implementing prudent fiscal policy underpinned by adherence to fiscal rules, as enunciated in the Public Finance Management Act.
These reforms reprioritise capital expenditure and commit to increase the budget on capital expenditures from 16% of total budget expenditures in 2018, to more than 25% in 2019 and 2020.
Ecsponent’s competitive advantage
As an investor in financial services in this country, we are at the forefront of witnessing economic change. And while some may shy away from such an investment, preferring instead to choose a “safer” option, like US-based equities, all investors have a different view of what may or may not constitute value. For us, Zimbabwe holds lots of promise and when comparing risk, the upside opportunity is justifiable in comparison to more mature markets.
We see potential in the development of the country’s SME sector, an area of core competence for the Ecsponent Group. We are not alone in our view. In 2018, there was an almost four-fold increase in total start-up funding received for African start-ups, demonstrating the increased confidence in the continent’s growth prospects. In total, African start-ups raised a record US$725,6 million across 458 deals, according to a 2018 venture investment report.
Naturally, as in all areas of the world, political policy and commensurate action is critical to support Zimbabwe’s message that it is open for business. And once that strategy is back on track, following recent disruptions, Ecsponent will be an active participant in realising growth expectations.
“Everyone wants to be [a contrarian], but no one is, for the sad reason that most investors are scared of looking foolish.”