Declining trade threatens stockbrokers

This has been worsened by the reduction in the dealing commission from 1,5% to 1%, which has put significant pressure on broking firms’ margins.
Brokers said since the economy dollarised in 2009, there had been a rise in competition in the industry whilst the market had not grown in terms of new listings.

Analysts have attributed the thinning volumes on the Zimbabwe Stock Exchange (ZSE) to the prevailing negative economic sentiment which is keeping foreign investors at bay, as well as tight liquidity conditions on the local market.

ZSE chief executive officer Emmanuel Munyukwi lamented the changing fortunes of some broking firms, saying the depressed trading conditions were partly due to uncertainty created by the ongoing indigenisation debate, and the poor state of capitalisation of Zimbabwean companies.

“I do not think we can attribute the low volumes to the indigenisation debate alone. We have good companies in Zimbabwe but unfortunately they are grossly undercapitalised,” said Munyukwi.

The ZSE boss said whilst there was nothing wrong with indigenisation,the way it was being implemented was creating uncertainty and keeping investors away from the market. To understand this, one had to put themselves in the shoes of the foreign investor.

Munyukwi pointed out that Zimbabwe had companies that had not invested in capital assets, with some still using equipment dating back to the 1930s, rendering them uncompetitive and unattractive to investors.

Analysing the profile of counters on the ZSE, Munyukwi also observed that a few large firms dominated the market capitalisation of the ZSE, something he considered unhealthy.  On the other hand, there were too many penny stocks.

In terms of the stockbroking firms themselves, three out of 19 stockbroking firms dominated 60% of the realised business, leaving the rest to fight for the remainder. The three stockbroking firms, Lynton Ewards, Imara and IH Securities dominated the foreign investor market share.

A senior stockbroker with MMC Capital said if one did not have foreign clients it was difficult to stay afloat.

“There are very few local deals and it’s the brokers with foreign clients that are making ends meet,” said the dealer.

However, trading statistics obtained from the ZSE paint an interesting picture. Between February 2009 and December 2009, total foreign deals valued at US$146 million accounted for 35% of trade, whilst representing 17% of volume traded.

In 2010, foreigners accounted for 46% of US$180 million of value traded but the deals were 46% of the volume of shares traded.

Foreign participation on the ZSE increased to US$343 million 2011, representing 72% of value traded and 30% of trade volumes.

The trend has been maintained into the first quarter of 2012, where at US$108 million, foreign deals have accounted for 91% of value and 43% of volumes.

The data shows that during this period, the total value of shares traded was fairly stable — US$413 million in 2009, US$391 million in 2010 and US$477 million in 2011.

The problem for some broking firms, therefore, seems to be that they need to attract foreign clients. The data also indicates that foreign buyers are keen on the larger cap stocks which represent the well-capitalised companies. 

The larger companies also have deep pockets and have “big brothers” who are funding their operations, making them more attractive. The ZSE market capitalisation is dominated by a few such firms and only 10 companies account for 67% of the value on the ZSE.

Mehluli Mpofu, head of research at Old Mutual Investment Group, said reduced activity by local institutional investors contributed to the low volumes on the ZSE.

“One finds that the outlook on most equities is negative, so fund managers have been aiming to reduce their exposure to equities by channeling new money to other asset classes in order to re-balance their portfolios. Its important to remember that, prior to February 2009, portfolios were heavily weighted in favour of equities. Buying activity on the ZSE is therefore limited,” Mpofu said.

Another fund manager said whilst inflows from pension and life assurance contributions were increasing, the portion available for investment after paying benefits and claims was still negligible, hence the demand for equities by local pension funds was still subdued.

Although there were differing views from analysts on the cause of reduced volumes on the ZSE, there is agreement that there is a viability challenge for most firms, given that business is at present concentrated amongst a few firms. Most still have structures that were set up during the hyperinflation era.
Before the market dollarised, inflation was paying for growth of the industry. The cost base was constantly being whittled down by inflation whilst speculative trades were also fuelling high activity levels on the ZSE. 

Costs have, however, caught up in US dollar terms and there is little room for speculative trading on the markets now. Most fund managers and private investors now buy and hold shares for the long haul.

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