Zim’s unorthodox business cycle – the Zimbabwe Independent


By Tafara Mtutu

The economy is slowly showing signs of recovery from the pandemic, and central banks in some economies have already started to take steps to contain demand-driven inflation.

The recovery is forcing capital market players to determine the path of the global economic cycle and how best to recalibrate their portfolios.

A good understanding of business cycles is essential in defining capital market expectations, and this has been widely accepted by many capital market participants around the world.

An economic cycle is a perpetual cycle of growth and contraction in an economy that is often measured by the trend in the growth rate of GDP.

Economic cycles can extend over several years or even a few months. The United States, for example, had a 28-month business cycle that ended in November 1982 and a 128-month cycle that ended in April 2020 and its business cycles last for an average of 56 months.

At every turn, advancing economic cycles often provide strong indications of returns across multiple asset classes. Economic cycles are particularly important for investors who wish to profit from short-term fluctuations.

Long-term investors subscribe to the theory of averaging asset class returns over a long investment horizon and as such do not feel the need to frequently fine-tune their portfolios in response to the cycle. economic.

Additionally, institutional investors who correctly ride the waves of the business cycle can generate superior returns for their clients over time.

There are two main phases in a typical business cycle; the contraction and expansion phases, which can be divided into five phases, namely (i) initial recovery, (ii) early expansion, (iii) late expansion, (iv) slowdown and (v ) contraction.

The initial phase of recovery is often characteristic of economies reaching their lowest point after a recession, with very low short-term interest rates and a very steep yield curve.

During this phase, monetary policy measures are mostly accommodative with the aim of “reviving” a struggling economy. A pick-up in spending on durable consumer goods, unemployment and overall business confidence are also observed during this period.

As monetary policy measures begin to take root, an economy moves into the first phase of expansion, characterized by increased dynamism, production, investment, and profits.

This is also reflected in rising employment figures, increased borrowing and consumer spending. Tapering is also beginning, as central banks slow down stimulus packages and begin to control economic growth. As a result, short-term interest rates slowly rise and yield curves flatten slightly but remain tilted upward.

The economy train is full steam ahead in the late expansion phase, and authorities are doubling down on containment measures at this point. Short-term interest rates are often raised further upward and yield curves flatten further.

The characteristics of this phase are generally similar but more pronounced compared to the early expansion phase. The continued rise in interest rates begins to reduce borrowing and the economy is headed for a slowdown.

The yield curve is flat and in some cases inverted. In many cases, economies are particularly sensitive to shocks such as global crises and pandemics at this point.

The strong hold on economic growth by central banks then causes a contraction, which is evidenced by rising unemployment figures, falling profits, cutting spending and falling interest rates. Central banks put in place measures to counter the contraction and the cycle continues.

As the business cycle progresses, inflation can exceed or fall below market expectations, affecting asset classes in different ways. When inflation exceeds expectations, inflation hedges, such as real estate and commodities, become more attractive than bonds and stocks. In the event of deflation, bonds become attractive especially when interest rates cannot fall below 0%.

Zimbabwe’s business cycle, by contrast, exhibits characteristics that are inconsistent with theory and empirical evidence in many other markets.

Like the global economy, Zimbabwe’s GDP growth forecast of 7.8% in 2021 and 5.4% in 2022 after a growth rate of -4.1% in 2020 is indicative of an economy moving from a recession to an early expansion phase.

The upward trend in interest rates from 15% in June 2020 to 60% in October 2021 also supports this view. However, inflation has trended downward, from a peak of 838% in July 2020 while the country was still in recession to 55% in October 2021.

Unlike developed markets whose inflation rates are primarily demand-driven, inflation trends in Zimbabwe have been largely determined by supply-side factors and central bank measures to control growth in the economy. supply-side inflation have been implemented in a surgical manner without weighing on the country’s economic growth prospects.

The unorthodox combination of positive economic growth, rising rates and falling inflation has mixed implications for Zimbabwe stocks.

An increase in interest rates could reduce the debt financing of projects and working capital for many companies, but this will be offset by an improvement in disposable incomes induced by agriculture and a slowdown in inflation.

We believe this will be beneficial for companies that (i) are cyclical, so that a slowdown in inflation will translate into a larger increase in demand, (ii) do not need funding through large borrowing to maintain their creditworthiness, and (iii) closely take advantage of the benefits of a good agricultural season in the country.

We note that the banking sector is an industry that will benefit greatly from these unique circumstances as we approach 2022, all things unchanged.

The sector’s overall loan-to-deposit ratio has steadily increased from 31% in December 2018 to 43% in October 2021, and 30% of these loans are invested in the agricultural sector, which is expected to have another good season. in 2021/22.

Investors should consider financial services stocks in their portfolio with the help of their investment advisers.

  • Mtutu is Research Analyst at Morgan & Co. – tafara@morganzim.com or +263 774 795 854.


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