FOREIGN participation on the Zimbabwe Stock Exchange (ZSE) has remained dominant on the sell side in the first month of the year, continuing the 2016 trend where foreign outflows peaked at US$136,8 million.
FINANCIAL MATTERS WITH SHINGAI MOYO
So far this year, foreigners have remained largely on the sell side with a total of US$2,2 million exiting the market. Foreign contribution to turnover has however improved on a month-on-month basis, at 18% compared to 6% in December 2016. However, over a larger time horizon, foreign contribution to turnover averaged 31% which is almost twice the January 2017 level. Although it is still too early to determine the overall flow of trades on the local bourse, it is clear that local investors are now in control of the market dominating the buy side.
The upsurge in local buying is largely a result of perceived risks in the money market investment portfolio as a result of bond notes. Both local and foreign investors are bearish on the middle to long term impact of the bonds notes which has necessitated a reconfiguration of investment portfolios from the highly exposed money market to equity market.
Initially, the stability of the US dollar and real inflation-adjusted returns had increased the allure of the money market ahead of the faltering equity investments in the eyes of local investors before the new monetary policy measures. This was evident especially in the first half of 2016 where a greater fraction of the companies reporting for the half-year period increased their money market asset holding against the stock market holdings.
However, everything took a sudden shift with the announcement of the coming in of bond notes. Since the beginning of October 2016 local investors have been very active on the ZSE increasing their exposure in equities, resulting in firm stock prices. On the other hand foreign investors were also struggling to exit the market given foreign payments gridlocks.
There was generally a sudden and unavoidable shift in investors’ asset holdings with many preferring to hold equities rather than the money market.
The wider perception is that holding money market assets may result in loss in value given the uncertainties surrounding bond notes. The trend has continued into January 2017 with local investors increasing their exposure to equities whilst foreigners are hunting for an opportunity to exit.
Generally, with a shift or change in currency, it is the money market which feels the heat first and as such investors opt to hold equities.
Foreigners on the local bourse were lured by a stable currency and a low inflation. However, with the introduction of the bond note and the resulting entrenched shortages of US dollars, foreign investors have no option but to exit the market.
A foreign payments gridlock also worsened the situation and further weakened sentiment as it affected share sale settlement. And some companies are failing to pay foreign dividends due to depleted nostros.
This results in low foreign investor participation on the local bourse. The long-term effect of this low foreign participation is reduced demand for local equities.
This will have a negative impact on the market’s average price which will have to come down to match subsidising demand.
Further deterring foreign investor participation is the prevailing economic environment. In the absence of a positive economic uptick, foreigners are likely to remain net sellers on the local bourse for the rest of the year. Risks associated with elections will also deter foreign participation. Other factors such as increased yield on US assets associated with the Fed Reserve rate hike will push capital from emerging and frontier markets, which are generally perceived as high risk, to less risky markets.
Blue-chips led by Delta, Econet and Innscor have been attracting foreign investors participation on the ZSE over the years. In the absence of stronger earnings from these companies, foreign participation is likely to remain subdued.
However, earnings are a function of the overall economic performance and as such the authorities are urged to implement and enforce programmes and policies that will bring back the economy to the growth path.
Moyo is an economic consultant.