ZSE outperforms African bourses


The Brett Chulu Column

IT is totally ironic that for all the negative macro-economic and social indicators we are accustomed to when it comes to Zimbabwe, our Zimbabwe Stock Exchange (ZSE) is the best performer in Africa.

This column is read by people from various backgrounds, including financial and non-financial. Looking at a stock exchange from the perspective of a farmer can help those not familiar with its workings get as much as possible from this article. Imagine the different shares or stocks as different breeds of cattle.

Imagine further that a stock exchange is one big ranch with several paddocks — each paddock representing the stocks of a company listed on the exchange.

Over a long period time, a stock market, in terms of value, grows in the same way a farmer’s herd of cattle does — the only difference being that natural cattle multiply much, much faster.

The Industrial Index would be the equivalent of averaging the increase in the number of cattle in the majority of the imaginary paddocks in the ranch we have called the ZSE. On a two-year basis, with this analytic period ending at the time of writing this article, Zimbabwe’s Industrial Index grew by a staggering 89,1%.

The Zimbabwe Industrial Index is a measure of the combined growth of all non-mining stocks. It contains the biggest contributors to the entire ZSE in terms of market capitalisation and trading volumes.

This growth of 89,1% in two years, using our farming analogy, means that if stocks on the majority of paddocks called Industrial were cattle — our cows are giving birth every two years.

This is extremely good growth — the big international stock exchanges record growths which translate to a cow giving birth every 10 years. The next best-performing African stock exchange in the same period is the Egyptian Exchange—its main index, the EGX 30, grew by 14,73%.

In cow terms, this is the equivalent of a cow giving birth every five years. The third best-performing bourse in that same period is the Johannesburg Stock Exchange (JSE), whose All Share Index grew by 4,93% — the equivalent of a cow giving birth every 15 years.

The sheer difference between the growth of the Zimbabwe Industrial Index and its African peers is astounding — it is six times the Egyptians’ equivalent and 18 times the South Africans’ equivalent. The majority of the rest of the African bourses recorded negative growths in that same two-year comparative period.

The astounding growth of the Zimbabwe Industrial Index is no fluke at all — it is real growth as it trumps inflation. To get a handle on the quality of the growth, we need to consider its growth from 2009, when the economy adopted multi-currencies.

In March 2009, the Industrial Index was sitting 51,41 points. It grew ferociously over the course of 10 years to reach a peak of 773,06 points in June this year — the month the use of multi-currencies was banned. This represents a nominal growth of 15 times — it is phenomenal. To ascertain what portion of this 15-fold growth is real, we need to take inflation into account over the same period.

Over the period ending June 24, when the surprise announcement ending the use of multi-currencies for local transactions was made, inflation grew 2,08 times. This means inflation chewed off growth of the Industrial Index by a factor of 2,08 times, leaving us with an unbelievable growth of 13 times.

Using our farming analogy, if one had invested in every company (cattle paddock owner) that makes up the Zimbabwe Industrial Index (cattle ranch), they would have received 18 times what they invested in (the equivalent of 17 more extra cattle from each cow they had invested in 10 years ago). This is an extremely rare return from a stock market investment.

The bleeding of value of the ZSE in the past few weeks is causing many to panic. The Zimbabwe Industrial Index has plummeted from its June peak of 773,06 points to 542,01 points (at the time of writing) — representing a loss of 42,6% — that is huge. Adding to that apprehension is surging year-over-year inflation, which was threatening to breach the 200% mark just before Treasury discontinued the publication of year-on-year inflation figures.

Our past has shown that when the threat of inflation looms large, people pile into the stock market — this is not happening at the moment.

Given that the removal of the multi-currencies has seen the value of stocks being wiped out in US dollar terms — the fall in the value of the stocks in terms of market capitalisation (the equivalent of the combined value of the imaginary cattle in the stock market farm) in US dollar terms mirrors the loss of value of the RTGS dollar against the US dollar since June 24.

My suspicion is that those who are in panic mode are classified as speculators or traders as opposed to investors. The pioneer of value investing, Benjamin Graham, a name revered in stock market investments — who coincidentally is Warren Buffet’s mentor — distinguished between speculation and investment.

Investment is defined by Graham as an operation where after a thorough analysis, the investment promises the safety of the principal (seed) and an adequate return (harvest).

Graham says any operation that does not fit this description is mere speculation. We have a proper term for it: a lottery. Using the farming analogy, investment is when after careful analysis a farmer is assured that when they sow there will be a harvest that will, at the minimum, return the seed sowed and give a reasonable harvest.

In Graham’s thinking, investment shies away from get-rich-quick schemes and unrealistic returns. In Graham’s time, rates of return of 6% after inflation were considered very adequate from an investment perspective (not speculation). Bringing Graham’s thinking to the ZSE, the plummeting of the Industrial Index from the high of 773,06 points to 542,01 points should not cause panic to an investor. There are reasons for that.

First, the level of 542,01 represents a 8,5-fold increase in real terms from March 2009. This growth is 24% a year — this is extremely high. Second, further haemorrhaging would not cause an investor in Graham’s sense to panic at all; 24% per annum real growth is more than generous and perhaps unsustainable going forward.

Rates of growth of stocks that are close to the birth rates of cows are dangerous — you cannot have man-made enterprises multiplying faster than animals which were wired at creation to multiply — such growth rates will always end up in tears sooner or later.

The story of the ZSE being the best-performing bourse in Africa is a remarkable one and is quite an anomaly — it is very doubtful that this will continue into the future, unless the buyers and sellers on the ZSE are mainly speculators. Growth on a stock market comes from three sources: growth in companies’ after-tax profits or dividends, inflation and speculation.

If one were patient to granulate the source of growth of the ZSE — isolating the three components of growth — one would be able to see clearly the speculative component. Based on this analysis, a smart investor would draw boundaries that guard them from being carried away by tempting growth numbers, especially those investing people’s pension contributions — we cannot play tombola with other people’s money.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.