Will delisting Old Mutual stabilise exchange rate?

LAST week, the ruling Zanu PF recommended the ejection of Old Mutual Limited from the Zimbabwe Stock Exchange (ZSE), while subsequently mulling the establishment of a separate “forex-based” bourse, where this and other counters will be listed.

This recommendation comes when government has halted the entire trading activity on the main board, now in week three. The only other time the stock market was halted was in November 2008 at the peak of hyperinflation. Old Mutual is among 57 active counters trading on the ZSE, but it is unique in that its listing on the Zimbabwe Stock Exchange is secondary as it is listed primarily on the Johannesburg Stock Exchange in South Africa.

For starters, one thing that escapes most commentators on the dynamics around Old Mutual’s trading on the ZSE is that the Old Mutual which is listed on the ZSE is not Old Mutual Zimbabwe, but its parent Old Mutual Limited headquartered in South Africa. It also escapes many that Old Mutual, then known as Plc, terminated its primary listing on the London Stock Exchange in 2016, delisted in all the markets where it was present and immediately relisted primarily on the Johannesburg Stock Exchange and on Zimbabwe Stock Exchange, among other secondary markets, including the London Stock Exchange, as Old Mutual Limited in that respective year. These changes were in line with the group’s thrust to refocus on Africa, which is where its roots are and also its largest market.

By listing in several markets, Old Mutual has been able to spread its shareholding across different markets. This has also allowed respective capital markets in which the company has operations to enjoy the benefits of diversification and risk spread, given the geographical extent on which the underlying asset (operations) is located. By listing in various markets, Old Mutual has empowered the respective economies where it maintains a listing, while deepening respective capital markets for the benefits of locals. Due to its diversification in different markets, at least 15, in Africa and significant exposure in one of Africa’s biggest economy, South Africa, Old Mutual is typically a rare gem and blue chip with stable earnings, which provides investors across the region with stable dividends and capital appreciation. It is very difficult to find any listed stock across the regional exchanges with unique features such as those inherent in the Old Mutual counter. It is time Zimbabwe realised that the listing of Old Mutual Limited on the ZSE benefits Zimbabweans more than it does the company. The market is starved of new listings, neither does it really have the capacity to raise hard currency in capital raises. Old Mutual, for the purposes of listing, can simply do without Zimbabwe.

Let us take Old Mutual into perspective. The stock, just like any other on the ZSE, has been subjected to country-specific risks, as reflected in the currency turmoil. Rationale and risk-averse investors have factored in the impact of inflation and exchange rate loss as part of macro-economic fundamentals at the heart of stock valuation. The overall stock market has rallied strongly since the beginning of the year, notching up more than 600% in Zimbabwean dollar terms and above 100% in US dollar terms. Old Mutual, in turn, has rallied only 150% over the same period in Zimdollar terms. Going by this statistic, it would follow that demand for stocks on the ZSE has generally been higher than Old Mutual share demand in 2020. It is therefore unwise to deduce that Old Mutual’s share rally — seen as a conservative rate when compared to the overall market movements — is the driver of exchange rate depreciation. In the least, trading activity in the counter cannot be dubbed speculative as it lagged the overall market in the period from January 2020 to the end of June. Fundamentally, the rally in stocks is traced to increased liquidity in the market which spurs demand and subsequently prices. In 2020, money supply, as measured through reserve money, has so far grown by about 30% while in 2019 reserve money grew by a staggering 350%.

Looked at differently, suppose Old Mutual is ejected from the stock market and the bourse maintains its strong rally, it would follow that the stock market would create significant monetary value from stocks appreciation sufficing to push the rate as selloffs are consolidated to hard currency. Practically, the value of stock market companies on the ZSE has soared from ZW$29,8 billion in January to ZW$228,7 billion as at end of June 2020. This means almost ZW$200 billion in monetary value was created via the stock market in the six-month period to June. Now assume this additional growth in value is realised through share disposals, it increases liquidity in the economy and puts pressure on the exchange rate as investors look to solidify their stock market realised gains through hard currency. In essence, with or without Old Mutual, weak underlying economic fundamentals can potentially continue to spur stock market gains and, in turn, drive exchange rate depreciation.

Respect Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

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