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Selling Pressure Leaves Companies Exposed

THE selling pressure on the stock market has forced share prices lower than what the market was anticipating.

After three months of inaction, the Zimbabwe Stock Exchange resumed trading last Wednesday with only Apex Corporation trading on the first day as all the other counters found no takers.

There has been a big spread between buyers and sellers. Buyers are offering prices “way below” what sellers are asking for.

This, analysts said, made local companies easy targets for takeover by foreign investors. The main stumbling block for most of them however are laws that limit foreign investors to only a 40% shareholding in a local company and the cost of transacting which is more than twice what the region is charging.

Given that on Tuesday, Delta, one of the blue chip counters on the local bourse, traded at US$0,20c, if one invested US$1 000 on the day they would have bought about 5 000 shares.

In such an environment where more than three quarters of the companies listed on the stock market are trading below US$0,10, two different foreign investors can easily take over a company or be a major shareholder by investing about US$6 000 which can be obtained by selling a Madza 323 Familia vehicle.

Individuals in Zimbabwe are not allowed to have a shareholding that is more than 10% in a company. Stockbrokers however this week said individuals who had money were using nominees or other individuals to buy shares on their behalf to avoid violating stock exchange rules.

“The richest people in the world made their money on the stock market. There is a lot of potential in Zimbabwe, but the main stumbling block is lack of clarity on foreign exchange regulation,” a stockbroker said.

Stockbrokers said the Minister of Finance, Tendai Biti, the Securities Exchange Commission (SEC), and Reserve Bank governor Gideon Gono are failing to speak with one voice on a number of rules that govern how the local bourse should operate.

“Foreign investors are being discouraged by transacting charges on the local bourse. The minister (Biti) wants 5,1%, while the SEC wants 7,5%,” the stockbroker said.

“The region is charging about 3% and their economies are performing better than Zimbabwe. Why would foreigners want to come and pay about 7,5% in Zimbabwe?” said the stockbroker.

For purchases, a brokerage fee of 2% was agreed, although the SEC wanted 1% but Biti said he wanted 2% to boost value added tax.

Stamp duty was agreed at 0,5% while value added tax would be 15% of brokerage fees.

For sellers, 2% would be charged for brokerage, while 15% would be paid for value added tax.

Some analysts said it was going to be difficult for Biti, Gono and the SEC to speak with one voice as there was no productive sector in Zimbabwe and as such, the local bourse was a refection of the situation in the country.

Some stockbrokers said Zimbabwean companies were not necessarily going to fall victim to predatory foreign investors for a while.

“There are quite a few uncertainties especially from sustainability of the government of national unity and its implications on policy flip-flopping,” the stockbroker said.

Stockbrokers said some clients were still sceptical about bringing their funds into the formal banking sector owing to past experiences where foreign currency retention ratios have been tweaked every so often and in most cases without warning.

“The major challenge we face therefore is confidence in the monetary and fiscal systems of the country. There is a lot of interest, especially from South Africa, but again confidence issues slow down any significant investment.

You can also look at the fungibility of shares, with one side saying it is now legal and others saying it is not,” stockbrokers said.

The indigenisation legislation is also said to be playing a part in undermining foreign investment.

Before trade stopped on the stock market, prices were very high in local currency because they were being influenced by parallel market activities. Prices are now lower in US dollars partly because of the effects of the global financial crisis.

Trading was brought to a halt on the ZSE on November 20 after Gono read the riot act to banks that were using fraudulent cheques to artificially inflate share prices.

The halt was further extended after the SEC ordered stockbrokers to submit audited financial reports of their net worth by the end of December 2008.

The commission warned broking firms that they would be closed if they failed to meet the deadline.
“Global stock markets are plummeting on the back of recessionary fears.

Zimbabwe is not immune. Selling pressure is also coming from companies that are looking for working capital as the banks have no foreign currency to give them,” economist Brains Muchemwa told the Zimbabwe Independent.

There have been mysterious buyers on counters such as CFX since trade resumed on the stock exchange and foreign investors are said to be studying the market for “possible investments”.

“Presently there has been substantial evidence of foreign investors standing by to buy shares on the ZSE, although those rumours have been circulating for some time now,” said Kingdom stockbrokers.

The few buyers that exist on the market are taking advantage of the desperation of sellers on the equities market to put in very low bids for shares.

“We expect investors to remain cautious over the coming months as the new government continues to articulate policies. We believe that opportunities lie in cynical sectors that are likely to see an upturn in the coming months,” said ZABG stockbrokers this week.

On Tuesday the local bourse continued to trade mixed, with the value of the day’s trade rising to US$42 694 from US$37 171,18.

A total of 21 counters traded on the day compared to 13 the previous day.

Economic analysts said Zimbabwean banks were too weak to meet the demands of industry whilst the export market, the window of hope, was not attractive.  

The question which arises is: who is going to strengthen the balance sheets of banks when over the past four years they have lost capital by subscribing to government Treasury Bills (TBs) whose returns were fixed in the face of galloping inflation?

Every monetary policy announcement during this hyper-inflationary period came up with a promise to tighten liquidity and every bank took cover in the deemed “liquid” TBs to prepare for the rainy days to come.  

In that safety zone of buying huge amounts of TBs, local banks who are now supposed to facilitate stock exchange transactions, have lost their balance sheets and capital to inflation, and the economy is begging for a lifeline as reflected by events on the stock market after it was dollarised.

“As the 340% yielding TBs succumbed to inflation, the loans to corporates lost their lustre as companies stopped borrowing the local currency that was getting unacceptable,” Muchemwa said.

The local currency has since died a natural death.

The banking sector, like any other sector that used the local currency as the transaction asset, has been decimated at its core and needs a huge bailout for the economy and the stock market to start recovering.
The current unstable economic environment makes it tough for policy makers, and the choices are limited.

BY PAUL NYAKAZEYA

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