Ceteris Paribus with Respect Gwenzi
THE Zimbabwe Stock Exchange (ZSE) resumed trading last week after a five-week suspension at the instigation of the government of Zimbabwe, but three dual listed stocks out of the listed 59 counters remain under suspension. As trading resumed, the ZSE Chief apologised for the halt in trading and assured investors that the bourse was safe. The government also announced that all listed companies were absolved of any wrong doing but that the three counters will remain under suspension pending a move to a new foreign currency denominated stock exchange which is in the process of the being established. The market closed the week down 16% on a cumulative basis which is the worst weekly outturn in one year. Trends further show that a significant fraction of the disposals during were undertaken by foreigners.
The fears in the market were on whether the ZSE would be able to attract new investment portfolio funds going forward and likewise whether companies listed would elect to maintain their listing in the face of harassment and the negative publicity suffered by companies such as Old Mutual. The market has been sweating to attract new listings. The ZSE has not attracted a new listing in almost a decade save for spinoffs in existing ZSE listed companies, a good fraction of which has been weaned off behemoth Innscor Africa. It is also unfolding at a time the market has been less attractive to investors as evidenced by reduced capital raises such as rights issues, subdued share price appreciation before the dedollarisation era and reduced foreign participation. Foreign participation has eased from an average of about 60% in the formative periods of dollarisation to less than 30% in 2020.
For investors in capital markets, policy makers concerned about savings and investments levels and economic growth, these concerns were of paramount importance. The dice, which government tossed, was a real risk which could potentially ground capital markets in Zimbabwe. Feedback from foreign investors, such as Allan Gray a wealth management fund based in South Africa, who are invested in some of the heavyweights on the ZSE, exposed some these fears. Equity Axis’ preliminary view is that foreigners have maintained an exit stance from the bourse. These have long been looking for ways to exit the market but low foreign currency liquidity and worse, a malfunctioning foreign currency auction system deterred them from leaving. Increased volatility in the economy, weak underlying performance in investee companies and the abrupt policy shifts are factors enough to strengthen foreign investors’ resolve to exit the market.
However, one key catalyst for exiting which has not been there over the past at least three years is passage to exit. Only availability of liquidity would ensure a smooth exit from the hostage. The fungibility route, which existed until late 2019, gave investors an alternative but less fluid route to exit the ZSE. The consequence of an implied rate was however unbearable for the State since it reflected the underlying high demand for forex. A redeemed foreign currency market which resumed trading late in June following an over 50% depreciation in the local currency on the parallel market, has now opened a window for investors to exit the market at an even lower cost. Statistics from the RBZ shows that portfolio divestments as well as related payments have received an allocation in successive auctions since June. Fears are that the level of demand for forex would go up after the resumption of trading on the ZSE since most of the investors who had been locked in had passively accrued significant gains since the beginning of the year as the ZSE rallied. They would have earned a fair return to inspire a gracious exit at rates which are even lower than the parallel market and the then OMIR.
While this is the case, the net result is a market with weaker depth and less attraction given projected low foreign participation on outlook. With foreign demand, it would follow that shares would become lowly priced relative to their intrinsic value. Companies would further be disincentivised to list or maintain a listing on the ZSE. With a new US dollar market expected soon, investors would opt for hard currency returns and move funds from the existing main bourse. However, this may have its challenges such as regulation restricting movement of funds for pension funds and asset managers and the quality of listings on the VFEX. The current selloff on the ZSE is something that had been projected and it is believed it will run for at the next two weeks. There should be a trend reversal in a few weeks’ time as the interbank rate moves further up forcing investors to seek safe haven in stocks.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org.