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VFEX: Death at inception?


The Victoria Falls Stock Exchange is now in its 7th month of operation and yet it has only attracted one listing. This is perhaps a world record for any stock market within the same period. The VFEX registered its first trade two weeks after its launch, yet another negative indicator.  A measly total turnover of just US$180 was achieved on the respective first day of trading. To further demonstrate that the listing did not generate any meaningful attention from investors, the shares of the company which listed, SeedCo International had an initial asking price of 21,9c but only sold for 18c which was also a discount on its primary Botswana Stock Exchange listing price of 22c. To date, no additional listing has been recorded and no foreign participation has been registered either. A number of companies initially primed to hop on to the bourse have so far not yet confirmed the move.

These are early signs pointing towards a failed exchange but before a conclusion is drawn, study shows that a period of at least five years should be used as a scale over which a more informed assessment can be made. Empirical research carried out by Albuquerque de Sousa et al (2016) tries to narrow down tell-tale signs of future stock market success and failure based on a set of three variables. De Sousa et al’s 59 country investigation focused on the variables below within the first 20 years of bourse establishment. Researchers measured performance at a 16-20 year point using Market Cap: GDP (as a proxy for size of stock exchange), Turnover ratio (measure of market liquidity) and the number of listed firms (indicates diversification potential of exchange and its importance to the economy as a whole). De Sousa et al’s research results imply that the number of listings and turnover ratio correlate with performance of bourse.

With “correlation does not equal causality” in mind, de Sousa et al’s research took additional clarification steps in an effort to narrow down key stock market performance determinants.

Additionally, researchers carried out empirical studies to attempt to establish public policy’s role and the nature operating environments have on newly-setup or emerging stock exchanges.

Lessons learnt:

Within a 20-year timeframe, the first five years of a stock market set the tone for the remaining 15 years, led by the number of listings and market turnover as pivotal indicators of future success.

Low activity at formative stages as well as a limited number of counters attracted indicate a long-term likelihood of failure as a stock exchange (as measured by 3 KPI’s above)

Initial market cap is not necessarily an important variable to consider, at least not in the early years of a newly setup exchange.

Size of a national banking sector is the most reliable leading indicator, where “a higher 1% private credit provided by the banking sector and other financial institutions is associated with a 1% higher number of listed companies, a 0,4% higher market capitalisation (% GDP) and a 0,7% higher turnover ratio 15 years later”.

In-line with predicting a stock exchange’s liquidity, researchers look towards an economy’s national savings levels and historical saving patterns. This, in the long-run, facilitates demand levels as well as both stock exchange transaction volume and trade frequency.

In the study above the time horizon for study is very important in that it informs more reliable conclusions to be reached. It is also clear that the timeline for the review of the VFEX at this point is very short of the timeline prescribed in the study above. However, a lot of underlying issues would need to be interrogated so as to establish the likely future outcomes of the bourse. The VFEX was initially formed as a reactionary response to a failed dual listing system on the ZSE main board. The stock market was announced in October 2020, a month and half after the resumption of trading on the ZSE, which had however seen the suspension of dual listed counters including Old Mutual Limited, PPC and SeedCo international.

A separate exchange housing dual listed counters was thus seen as a way of accommodating the relegated counters from the ZSE main board. It was important to keep the dual listed companies on the local financial markets scene as it would have an impact on investor perception of the country and it would further impact capital markets depths. Completely doing away with dual listed counters would have sent a very negative picture to the rest of the world with regards to the rule of law, policy consistency, property rights etc, matters which had already dented the country’s status for two decades. My persuasion is that the formation of the VFEX was solely driven by the need to pacify some counters dropped from the ZSE, but also emboldened by the ill-fated ambition to attract new listings capitalising on the expected few forced listings.

As with anything in the capital markets, timing is important. Last week Coinbase, an exchange for cryptocurrency listed on the Nasdaq and soon generated more interest and investors pushed its IPO price beyond its reference price of US$250 to close on its first day of trading at US$381. The listing of Coinbase came at a time when the cryptocurrency revolution had shifted gears up with renewed strength. The most popular cryptocurrency Bitcoin had scaled by about 80% from the beginning of the year, with meme coin, dogecoin gaining wide appreciation on the internet. These manoeuvres have pushed for the mainstreaming of cryptocurrency and thus the timing of Coinbase listing was perfect.

A good idea executed at the wrong time or forcibly executed without much attention to more significant fundamentals may be disastrous. Zimbabwe had just banned equities in June 2020 bared 12 years after another ban at the height of hyperinflation, the country’s currency was depreciating at a scary rate, inflation rising and forex scarcer. Foreigners were struggling to remit portfolio disposal receipts but desperate to exit the ZSE. The populace had low confidence levels in the currency and the government, savings could not be consolidated due to inflation and a historical culture driven by fears of a recurring hyperinflation. These are all concocting factors militating against the promulgation of hybrid stock exchange.

The failure of VFEX to attract two of the three dual listings which were on the ZSE clearly shows that the odds are highly titled against its success. The two, which are Old Mutual and PPC, could have been thought of as low hanging fruit, but their reluctance to date, to hop onto the VFEX shows very low confidence from issuers of securities, even as they may be low confidence from the investing public. The fact that the management of VFEX remains the same as that of ZSE also demonstrates that there is little in terms of substance separating the two except for a separate depository. Authorities will have to go back to the drawing board and seek to promulgate stable policies and a stable macro environment that attracts savings and investments. It further has to look at technical aspects to spruce up the image and the operational aspects of the bourse to entice issuers of securities who are mainly on the sidelines engaging a wait-and-see attitude.

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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