Stock exchange must change or die

ZSE13.jpg

THE Zimbabwe Stock Exchange (ZSE) market capitalisation powered past US$4,7 billion early this year, pushed by investor exuberance, on the back of what most market analysts said was renewed confidence in the local bourse inspired by the conclusion of the constitution-making process and a successful referendum.

Report by Clive Mphambela

Having closed 2012 at a total capitalisation of US$3,963 billion, the rally in early January drove the market to a dizzy US$4,7 billion.

However, as with most similar runs, the rally was short-lived, driven by a few counters, mainly by foreign buyers.

Some analysts said the market had overshot its equilibrium, with valuations reaching optimum levels, so the market was slowing down naturally.

However, others said the market was fundamentally cheap, with valuations on the ZSE suffering largely from a deep sovereign risk discount.

They say the elections due this year are in fact a key decision factor for investors as the peaceful staging of the polls will act as a sign for investors.

The same analysts have also said the seemingly successful conclusion of the Zimplats deal had given the country an acceptable indigenisation template.

But things came to a head when allegations of impropriety in the awarding of an advisory mandate to Brainworks Capital raised eyebrows and triggered enquiries into the deal.

The market retreated a little and has only just started to recover, with the ZSE market cap, according to figures on the recently launched ZSE website, currently at about US$4,869 billion.

But what are the real drivers of the ZSE’s overall market value?
Market analysts may all be partially correct, and collectively their views probably aggregate to a near truth about what is driving values on the ZSE.

Unfortunately, analysts have traditionally always focused on short-term or temporary factors.

Most, if not all, analysts at present are looking at these short-term values factors, with little attention being paid to the long-term and structural causes of the stagnation that has dogged the ZSE over the past few years.

To partially unravel the puzzle why the ZSE has remained a dull market despite being rated as one of the best emerging markets since dollarisation, the answer lies in that these ratings and accolades have been largely based on the percentage growth in market capitalisation.

This uni-directional approach has only considered the financial performance of the ZSE indices, particularly the industrial index.

While important, the growth in market cap seems to have ignored factors that are equally important such as why exchanges are put in place in the first place. The developments on the ZSE suggest the local bourse must adapt to change or it will die.

One notable issue is that the ZSE has since dollarisation failed to attract any new primary listings. The bourse has seen only the reverse listing of TN Holdings, which has since delisted, and Padenga, which was carved out of the Innscor group. Stock markets by their nature are supposed to attract new companies to list.

A stock exchange’s value will grow as its number of companies listed increases. The size and value of the listed companies themselves must also increase over time if they are performing.

The ZSE has seen the value of companies such as Delta and Econet balloon over the last two or three years. The market capitalisation of Delta has risen almost 100% since August 2012 and currently stands at more than US$1,4 billion. This makes ZSE such a thin market, with few shares having sufficient demand and the liquidity desired by investors.

Analysts say as an exchange, the ZSE must provide a wide exit mechanism for investors in new companies.

The ZSE has no value proposition for companies that list. Companies may be deserting the exchange.

TN Bank was delisted, followed soon by Lifestyle Holdings. According to a report on local news wires, Econet has also threatened to quit its ZSE listing if certain actions towards modernisation of trading systems are not implemented by the bourse.

Such threats are telling, but what is the cause? Has the ZSE lost its course? Analysts say liquidity challenges in the economy have contributed to the failure by companies to raise capital on the ZSE, which is probably true.

However, is it that the companies themselves have failed to transform and dress themselves in a manner attractive to investors, particularly foreign investors? OK Zimbabwe successfully attracted a foreign fund in a deal that has had a profound effect on the success of the business.

For most of last year, the dominant news was the suspension of the then CEO Emmnauel Munyukwi. The press also widely reported plans by the ZSE for the Central Securities Depository which project was continuously stalling, but is now finally seeing the light of day.

The Remo and Interfin saga, which eventually spilled over into the courts, where two stockbroking firms were embroiled in a scrip-lending dispute over shares lent by one party, also hogged the limelight.

Now the ZSE has had an acting CEO for almost a year, with no sign that the bourse is actively looking for a replacement for Munyukwi.
Securities Commission of Zimbabwe CEO Tafadzwa Chinamo has been pushing for a more vibrant, dynamic and modern exchange with participants who observe the rules of best practice, but critics have accused him of being overbearing and heavy-handed when dealing with a few delinquent practitioners.

According to Globe newswire, the Nasdaq last week announced that in the first quarter of 2013 it recorded 33 new listings, including 18 initial public offerings (IPOs), more than any other US exchange. Combined proceeds raised by the companies listing on the Nasdaq totalled more than US$2,18 billion. That is half of the ZSE market capitalistaion in new listings in three months.

Contrast this with the ZSE since 2009, where there has been a dearth of new listings, let alone IPOs. In fact there has not been a single IPO since 2007, when the ill-fated engineering company, Zeco, came onto the exchange.

The ZSE lacks a market positioning, while markets like the Nasdaq are famous for supporting companies that are investing in transformational technology, health care, financial services and consumer businesses.

A proper market positioning, even among its peers, such as the Botswana, Nairobi, Malawi or Lusaka stock exchanges, puts the ZSE in its proper place among the community of stock markets.

Top