Zimnat Asset Management

2nd Quarter 2019 Investment Report

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TABLE OF CONTENT
1.0 GLOBAL ECONOMY ................................................................................................................................................................................................................ 3
2.0 LOCAL ECONOMIC ACTIVITY .................................................................................................................................................................................................. 4
3.0 INVESTMENT MARKETS ......................................................................................................................................................................................................... 6
3.1 Fixed Income Investments ................................................................................................................................................................................................. 6
3.2 Equity Investments ............................................................................................................................................................................................................ 6
4.0 MARKET PERFORMANCES ..................................................................................................................................................................................................... 8

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1.0 GLOBAL ECONOMY
• Global economic outlook: Increases in tariffs by the US and China, announced in May, signal a re-escalation in trade tensions. Global industrial activity
and goods trade have lost significant momentum in 2019, according to the World Bank’s Global Economic Prospects June 2019 report. As global
economic prospects deteriorate and inflation remains persistently low, major banks have implemented more accommodative monetary policies for
the near term. Global growth is projected at 2.6% and 2.7% for 2019 and 2020 respectively.
• The US: Activity is being strengthened by government spending and corporate tax cuts. Unemployment recently fell to lowest recorded levels in nearly
five decades. Productivity is on the rise in the US, according to the World Bank’s Global Economic Prospects June 2019 report. Growth of exports,
especially to Europe and Asia, have slowed in the wake of rising trade tensions. The US Federal reserve does not expect to raise interest rates for the
rest of 2019 amid slow economic growth. Monetary policy makers in the US voted to keep the interest rate range between 2.25% and 2.5%, changing
their initial outlook that had predicted two interest rate hikes in 2019. Real GDP growth is projected at 2.5% and 1.7% for 2019 and 2020 respectively.
• China: Growth in China appears to be stabilizing, following periods of broad-based deceleration. The World Bank is forecasting a growth of 6.2% in
2019 down from 6.6% in 2018. Trade flows have been weak, because of softened manufacturing output, trade tensions with the US and slow global
growth. In response to the tension with the US, softening exports and softening domestic demand, authorities have provided monetary and fiscal
support. Authorities have also stepped up structural reform efforts. New laws protecting foreign investors as well as laws strengthening intellectual
property rights are likely to benefit businesses.
• Sub-Saharan Africa: The economic environment in Sub-Saharan Africa remains challenging. External and domestic headwinds that caused the
slowdown in 2018 have not dissipated as quickly as previously predicted. Growth in the three largest economies in this region – Angola, Nigeria and
South Africa- has remained subdued. In Nigeria, recovery of the oil sector has not been as strong as anticipated. Policy uncertainty continues to constrain
investment in new capacity. In South Africa, policy uncertainty and rolling power cuts have slowed economic progress in the first half of 2019. Economic
activity is expected to recover due to easier external financing conditions. The new administration is also fast tracking previously delayed reforms that
will gradually improve the business environment.
• Commodities: Prices of most industrial commodities picked up in the first half of 2019. They however were still lower than peak prices from 2018. Price
forecasts, as a whole, have been projected downwards due to weaker than expected global growth. Gold increased by 10% to end the 1st half at
$1,409/oz , whilst nickel increased by 19% to $12,666/tonne.
• Oil: Since the beginning of 2019, crude oil has experienced a price increase of almost 30%. Prices however have not fully recovered from the 40% drop
in the fourth quarter of 2018. Demand for oil in 2019 has been dented by the ongoing trade war between the two major consumers of crude oil and
higher than expected US oil production. According to OPEC’s monthly market report, demand for oil is expected to increase by 1.3 million bpd in 2019,
but growing US shale oil activity is expected to limit price gains. Oil prices are forecasted to average at $66 per barrel

*Extracts from the World Bank’s Global Economic Prospects June 2019 report

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2.0 LOCAL ECONOMIC ACTIVITY
• IMF Staff Monitored Program (SMP) – The government of Zimbabwe entered a SMP that will run from 15 May 2019 to 15 March 2020. SMP empowers
IMF to further assist government in with technical advice on tackling market distortions e.g. subsidies, fuel arbitrage, and forex market. The IMF is of
the view that if fiscal reforms remain (including strict management of money supply growth), the economy will stabilise over next 12 months, currency
market will stabilise and inflation will normalize. However, political will remains key to the success of this program and a decision on funding, post SMP
will be largely determined by the US government.
• GDP growth: The IMF projected a negative real growth of 3.1% for 2019, following the introduction of the RTGS dollar. We expect GDP growth this
year to be in the region of negative 5% following the announcement of Statutory Instrument 142/2019, whereby the RTGS dollar is now the sole
currency for local trades. Inflation and foreign currency shortages will continue to weaken demand and strain production in the short term. Premature
removal of the multi-currency system has further deteriorated business and consumer confidence in terms of policy reforms.
• Statutory Instrument 142 of 2019 (SI 142): The Ministry of Finance on the 24th of June 2019 removed the multi-currency system in Zimbabwe and
pronounced the Zimbabwe dollar as the sole currency for legal tender purposes. Government believes that the increased domestic transactional
demand for US dollars was driving the black-market rate to unprecedented levels, resultantly accelerating the re-dollarization of the economy. The
core objective of this policy intervention was an effort to save the RTGS and Bond notes from complete collapse, given the devaluation of the RTGS on
the parallel market.
• The success or failure of this policy intervention will be determined by the market, over the next few months. However, the determinants of the success
or failure of the Zimbabwe dollar, from our perspective, will be fiscal discipline, decreased money supply growth, political reforms, Re-Engagement &
Arrears Clearance.
• Nostro FCA’s - According to SI 142 of 2019, the opening and operating of foreign currency designated accounts (Nostro FCAs) shall continue to be
designated in the foreign currencies with which they are opened and in which they are operated. What is clear from the subsection is that Nostro FCAs
will likely be only used for external payments only, going forward.
• Taxes- Custom duties and VAT payable on the importation of goods specified as luxury goods will remain in foreign currency. The promulgation of SI
142 of 2019, is likely imply that all domestic taxes will have to be paid in Zimbabwe dollars, doing away with the multicurrency tax regime that was in
place. One of the most effective means of creating demand for Zimbabwe dollars in the formal sector, is through enforcing all tax payments be in the
local currency.
• Inflation: Official May year on year inflation was at 97.85% just a few percentage points shy of the 100% mark that moves the country into
hyperinflation. Food and non-alcoholic beverages annual inflation was at 126.43% whilst non-food inflation was at 85.94%.
• Gold: The country racked in US$3,2 billion from mineral exports in 2018, of which US$1,1 billion was from gold. The experience for 2019 is likely to fall
below expectations given the declining deliveries to Fidelity Printers, which in the five months to May dropped by 20% to 10.8tonnes from 13.59tonnes
in the same period last year. Gold miners are compelled by exchange control regulations to surrender 45% of their export proceeds to the Reserve Bank
of Zimbabwe (RBZ) and this low retention level has negative impacts on the mines ability to meet its working capital requirements and encourages

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 deliveries to be made outside the formal channels, especially for small scale miners. In addition to foreign currency constraints, erratic supply of
electricity is disrupting production.
• Tobacco: In 2018, the country produced record 252 million kilograms of flue-cured tobacco, generating at least US$1 billion in foreign currency earnings.
However, the 2018/19 season has been below par because of the change in payment modalities and unfavorable weather conditions. In its June 2019
report, the Zimbabwe Tobacco Association said early indications were that tobacco production and US dollar earnings from tobacco in the 2018/19
season would decline compared to prior year. As at 12 June 2019, deliveries were down 11% in volume at 171.2 million kilograms. Halfway through the
selling season, the price dropped by 37% compared to last year. The average price mid-June was US$1.85/kg, against US$2.87/kg a year ago.
• Fiscal Performance: On the 20th of May 2019, the 2nd fuel price increment was implemented, from $3.36 and $3.22 for petrol and diesel respectively
to $4.97 and $4.89. This followed a directive from the RBZ for procurement of fuel by the Oil Marketing Companies (OMCs) to be done through the
interbank foreign exchange market. This meant that the 1:1 exchange rate that was being used by OMCs for the procurement of fuel was discontinued
with the intention of having one foreign exchange rate for the importation of all goods and services. It is not clear at this juncture how fuel prices going
forward will be affected by SI 142.
Monthly Fiscal Performance - 2019
• The increase in excise on fuel is expected to Jan-19 Feb-19 Mar-19 Apr-19 YTD actual Budget Weight
contribute significantly to government’s ($ mln) ($ mln) ($ mln) ($ mln) ($ mln) ($ mln) %
revenue. Total tax Revenue 468.19 597.08 812.17 810.25 2,687.69 2,454.53
• For the year to 30 April 2019, total tax Taxes on Income 107.66 141.36 255.97 135.12 640.12 630.81 23%
Customs Duties 22.85 20.69 47.43 53.43 144.40 178.33 5%
revenue was 9% above budget at $2.68
Excise Duties 96.99 227.96 240.71 295.07 860.73 560.63 31%
billion mainly driven by the IMTT tax and VAT 120.09 87.72 149.42 187.81 545.04 675.03 20%
excise duty. IMT Tax 98.52 94.73 87.72 104.07 385.04 282.65 14%
• The government consistently recorded a Other taxes 22.08 24.62 30.92 34.75 112.36 127.08 4%
surplus before capital payments from in Non tax revenue 19.39 9.64 20.14 11.76 60.93 29.39 2%
Total Income 487.58 606.72 832.30 822.01 2,748.61 2,483.92 100%
January to April 2019. However, the
sustainability of the surplus remains Employment Costs 281.93 285.58 282.04 320.69 1,170.24 1,116.96 54%
questionable, as fuel consumption declined Other recurrent expenditure 103.10 159.22 198.40 236.27 696.99 631.65 32%
following the prices increases and there Recurrent Expenditure 385.04 444.80 480.44 556.95 1,867.23 1,748.60
were wage adjustments for civil servants Primary surplus before
capital expenditure 102.54 161.93 351.85 265.05 881.38 735.32
effective 1 April 2019 ranging from 13-29%.
Capital Expenditure 0.12 76.52 96.56 138.34 311.55 432.90 14%
Total expenditure for the first four months of Total Expenditure 385.16 521.32 577.00 695.30 2,178.78 2,181.50 100%
the year was 7% above budget. -
Monthly Surplus/(Deficit) 102.42 85.40 255.30 126.71 569.83 302.42

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3.0 INVESTMENT MARKETS

3.1 Fixed Income Investments

• Following SI142/2019, Banks were directed to transfer to the RBZ the RTGS$/ZWL$s that banks are holding as funds for the foreign currency
historical or legacy debt. The Government, through the Reserve Bank, is assuming the debt at a rate of 1:1 between the RTGS$ and the US$. This RBZ
policy intervention is aimed at further tightening RTGS liquidity, as this measure is expected to mop around RTGS$1.2 billion from the market. Prior
to this intervention, the banking sector was already starting to feel the liquidity squeeze, as funds on the RTGS platform at the RBZ declined
gradually, as the central bank sold currency through the auction system. As more liquidity is sucked out of the system, whilst on the other hand,
government through SI 142 increases the demand for RTGS dollars, the resultant impact, may shock the market, from a liquidity perspective.
• Interest rates - The Central Bank adjusted the interest rate on the Reserve Bank overnight window upwards from the current 15% per annum to 50%
per annum in line with inflation trends. A rise in interest rates generally reduces the demand for credit at household and business level within the
economy, and thereby slows down overall economic activity. In Zimbabwe’s case, the intervention is aimed at controlling inflation which is now out
of control at 97.85% in May 2019.
• There has been a very slow increase in deposit money market rates and the expectation is with a tighter liquidity squeeze the rates may start to
increase in the third quarter. On average, money market rates were at 4% per annum.
• Prescribed asset threshold for pension funds was increased to 20% with a compliance date of 31 December 2019. Outlook and strategy – With a
tighter liquidity stance, it is important that we keep a closer watch on our money market counterparties liquidity positions and how they are responding
to increased changes in the banking sector operating environment.

3.2 Equity Investments

• Trading of dual listed counters on the ZSE – A vesting period of 90 days on disposal of dual listed securities or shares purchased by investors on the
Zimbabwe Stock Exchange was put in place effective 25 June 2019. The Old Mutual Implied Rate (OMIR) has always been a target for policy makers,
as it has been the reference rate for the parallel market. This policy intervention significantly affects foreign investors who used Old Mutual as a
means of exiting the Zimbabwe market. At inception of the policy, the Old Mutual share price reduced significantly and the next few months will tell
how foreign investors will adjust to the new announcement.

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• Stock Market Performance – The
stock market had a positive second
quarter with the ZSE All Share Index
and ZSE Top 10 Index gaining 68.3%
and 72% respectively. The market
hit a fresh post dollarization high of
773.10points on 24 June 2019 and
then slid into negative territory in
response to the vesting period on
dual listed counters. The ZSE All
Share Index closed the first half at
683.51pts and up 40% on a year to
date basis. On rolling year to 28
June 2019, the ZSE All Share Index
was up 101% and in line with official
CPI.
• Equities outlook and strategy: The
performance on the stock market
continues to be very volatile as
witnessed by the last week of the
second quarter. Cost push inflation
is still very high due to increased
energy costs following significant
electricity load shedding in the
second quarter of the year as well
as foreign currency shortages. With increased efficiency on the interbank market, we expect that foreign currency situation to improve eventually,
however, in the short-term businesses costs will be dependent on the cost at which they access the forex for their imported inputs. The extent to
which a business can continue to pass on these increased costs of production considering significantly reduced disposable income following
devaluation, will determine the profit margins, going forward.
• Our overall long-term strategy remains focused on value preservation through consolidating our positions in defensive stocks. In selecting our equity
holding we will continue prioritizing companies with a strong cash flow generating capacity, robust and resilient business models in light of the
foreign currency shortages, and a solid governance track record and structures. Valuations remain a key focus for our research team in the new RTGS
environment to determine the price with which we buy and exit the stocks.

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4.0 MARKET PERFORMANCES
INTERNATIONAL STOCK MARKET PERFORMANCE
LOCAL EXCHANGE RATE TO USD INDEX IN LOCAL CURRENCY US DOLLAR CONVERTED
Index 31-Dec-18 31-Mar-19 30-Jun-19 YTD Change 31-Dec-18 31-Mar-19 30-Jun-19 YTD Change 31-Dec-18 31-Mar-19 30-Jun-19 YTD Change
Advanced Economies
United States Dow Jones Industrial 1.00 1.00 1.00 0.0% 23,327 25,929 26,600 14.0% 23,327 25,929 26,600 14.0%
Britain FTSE 100 1.27 1.30 1.27 -0.4% 6,728 7,279 7,426 10.4% 5,284 5,589 5,853 10.8%
Japan NIKKEI 225 110.00 110.84 107.74 -2.1% 20,015 21,206 21,276 6.3% 182 191 197 8.5%
Emerging Economies
Brazil Bovespa Index 3.88 3.90 3.85 -0.8% 87,887 96,054 100,967 14.9% 22,669 24,621 26,247 15.8%
Russia MICEX Index 68.94 65.12 63.21 -8.3% 2,359 2,497 2,766 17.3% 34 38 44 27.9%
India S&P BSE SENSEX Index 69.44 69.26 68.83 -0.9% 36,068 38,673 39,395 9.2% 519 558 572 10.2%
China Shanghai SE Composite 6.87 6.71 6.87 0.0% 2,494 3,091 2,979 19.4% 363 461 434 19.5%
South Africa JSE ALSI 14.38 14.45 14.13 -1.8% 52,737 56,463 58,204 10.4% 3,667 3,907 4,120 12.3%
Sub-Sahara Countries
Zimbabwe All Share Index 1.00 3.01 6.62 562.2% 146 122 205 40.0% 146 40 31 -78.9%
Zambia LUSE All Share 11.90 12.13 12.85 8.0% 5,248 5,600 5,678 8.2% 441 462 442 0.2%
Botswana DCI Index 10.52 10.56 10.49 -0.2% 7,854 7,886 7,623 -2.9% 747 747 726 -2.7%
Tanzania All Share 2,294 2,309 2,295 0.0% 2,046 2,060 1,892 -7.5% 1 0.89 0.82 -7.5%
Nigeria Nigeria All Share 363.04 358.29 359.81 -0.9% 31,431 31,041 29,967 -4.7% 87 87 83 -3.8%
Ghana GSE Composite 4.85 5.32 5.42 11.7% 2,499 2,417 2,395 -4.2% 515 455 442 -14.2%
Kenya NSE 20 101.17 100.12 101.49 0.3% 2,834 2,846 2,633 -7.1% 28 28 26 -7.4%
Mauritius SEMDEX 33.44 33.91 36.60 9.4% 2,219 2,165 2,128 -4.1% 66 64 58 -12.3%

ZSE INDUSTRIAL INDEX - TOP 5 COUNTERS BY MARKET CAPITALIZATION

Price ZWL cents Weight- 30 Market Cap ZWL$ 31 Market Cap ZWL$ 31 Market Cap ZWL$ 30 Q2 Change in YTD Change in
Name Sector
30 Jun 2019 Jun 2019 December 2018 March 2019 June 2019 Market Cap Market Cap
Cassava SmarTech Zimbabwe Limited Technology 1.98 19.68% 3,691,571,986 2,590,577,000 5,120,016,383 97.64% 38.69%
Econet Wireless Zimbabwe Limited Technology 1.84 18.27% 3,698,050,000 2,849,634,700 4,753,708,795 66.82% 28.55%
Delta Corporation Limited Beverage 3.40 16.50% 3,802,799,433 2,839,111,436 4,291,727,030 51.16% 12.86%
Innscor Africa Limited Industrial Holding 2.60 5.60% 1,001,947,864 730,443,017 1,457,023,922 99.47% 45.42%
Padenga Holdings Limited Agricultural 2.19 4.56% 460,354,424 514,513,768 1,186,089,634 130.53% 157.65%
Sub-Total 64.61% 12,654,723,707 9,524,279,922 16,808,565,763 76.48% 32.82%
ZSE Market Capitalization 19,424,406,159 16,084,866,459 27,017,166,999 67.97% 39.09%