Time to play in the Blue Chips
For a long time now, Piggy has consistently insisted that investors should park ZWL balances in blue-chip stocks. This is because he sees massive opportunity in sectors and companies that are linked to Gross Domestic Product (GDP growth). Generally, the global economic rebound from the pandemic has picked up speed. Relief and stimulus measures in developed countries have done much to get the global economy back on the path of growth. The Organisation for Economic Co-operation and Development (OECD) is forecasting global output to rise 5.8% in 2021. Meanwhile, the US economy is expected to grow 6.9% on the back of wide-ranging support from government spending. While there are concerns that global growth is uneven across countries given the lack of vaccines in poorer nations, the overall sentiment remains positive.
Key triggers for an economy like Zimbabwe include (i) rapid Covid-19 vaccination programmes leading to a return to normalcy, (ii) a surge in foreign direct investment, (iii) speedy recovery of international tourist arrivals and (iv) changes in international relations. That said, the Government of Zimbabwe estimates that the economy will rebound by 7.4% in 2021 on the back of recovery in agriculture and mining. It appears that strong commodity prices (gold and tobacco) and a good agriculture season (bumper harvest in maize) should provide a fillip for the local economic in 2021, albeit off a low base.
The thinking here is that large companies that control a significant share of the market will likely out-perform in 2021. By definition, a blue-chip firm is substantially larger than the typical corporation. It possesses a competitive advantage that makes it extraordinarily difficult for other players to unseat market share from it, which can come in the form of a cost advantage achieved through economies of scale, franchise value in the mind of the consumer or ownership of strategically important assets. Looking at the business life cycle, most blue chips will fall under the growth and maturity stages. In the growth phase, companies experience rapid sales growth. The cash flow during this phase is also positive, representing an excess cash-inflow. On the other hand, companies in the maturity have gone beyond major capital spending and therefore cash generation is much higher.
Life Cycle Model
Source: Corporate Financial Strategy (Dr Ruth Bender)
Companies within these two stages also constantly re-invent themselves and invest in new technologies and markets. Recent trading updates and results releases confirm that consumer-facing blue chips are on a strong recovery path. Piggy likes companies such as Delta, Innscor, National Foods, Simbisa Brands, Econet and Cassava. These are large, well-established, financially sound companies with dependable earnings. The icing on the cake is that most of them often pay dividends to investors. The infograph below shows some examples of blue-chip dividend stocks;
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