Macro-economic drivers of ZSE volatility — Study

The Zimbabwe Stock Exchange (ZSE), like any capital market, is prone to various factors that underpin the volatile movements in stock prices and indices.

Tafara Mtutu Research

In many capital markets research papers, these drivers are typically classified under:

  • Macro-economic;
  • Sector-based; and
  • Company-specific factors.

Company-specific factors are those that result in the volatility of a specific stock. This also pertains to material events such as transaction activity and expansion into new markets. Recent examples of these factors at play on the ZSE include Meikles Limited’s proposed unbundling exercise, Padenga Holding’s recent acquisition of a mining entity and CBZ Holdings’ new agrobusiness unit.

Sector-based factors are those that affect a group of companies that are in the same industry. The bullish sentiments in ZSE-listed companies in the Food and Agriculture sector on the back of a satisfactory 2020/21 farming season is an example of a sector-based factor.

Macro-economic factors are known to affect the bourse regardless of company or sector. We undertook an empirical study to find out which macroeconomic factors drive the ZSE’s volatility, and the magnitude of their impact.

Our analysis used four macroeconomic variables, namely foreign investor activity, local liquidity, inflation, and currency movements in an ordinary least squares (OLS) regression.

Daily data used in the analysis was aggregated to monthly data on the basis that the distribution of log-returns of financial time-series data typically tend to normality, as the frequency decreases in a phenomenon known as Aggregate Gaussianity and because some data such as inflation could not be obtained at a higher frequency than monthly periods.

The data was also converted to first differences — the differences between consecutive figures in time series data — was used because the data is usually non-stationary and this often results in unreliable results. This method also works with unavailable data, as was the case when trading on the ZSE was suspended throughout July 2020.

A set of 15 months spanning between January 2020 and April 2021 was used to conduct that analysis because of the high volatility that was observed on the ZSE during that period and limitations in sourcing further independent variable data beyond this period.

This analysis regressed monthly changes in the ZSE All Share Index, the dependent variable, on the monthly movements in the four independent variables.

Inclusion of foreign investor activity in the regression was justified by the level of foreign investor participation which accounts for roughly 32% of ZSE’s daily turnover. Investment decisions by foreign investors sometimes differ from local investors and this results in unique price volatility.

A case for this assertion was observed when foreign investors lost confidence in the local market after a month-long suspension of trading on the ZSE in July 2020 and the introduction of the auction system that prompted foreign investors to pull out of the ZSE and exit the local market through the foreign currency interbank auction.

The selling pressure subsequently resulted in a bloody August on the bourse, which lost ZW$69,7 billion between June 26, 2020 and August 28, 2020. This variable was proxied as the monthly changes in the net foreigners’ position in turnover on the exchange.

Local liquidity was proxied by reserve money movements based on data supplied by the Reserve Bank of Zimbabwe.

There is empirical evidence for the positive impact of liquidity in various equity markets. The growth in money supply has also coincided with bull runs on the bourse, implying that people usually divert available Zimbabwean dollar balances from their bank accounts to the stock market in an effort to preserve value.

However, proxies for liquidity are difficult to ascertain in the Zimbabwean context considering that many liquidity measures that are used in developed markets cannot be applied to the local market. As a result, the analysis incorporated reserve money developments as an indicator of liquidity.

Inflation has also been another driver of volatility in stock markets across the globe. Given that the depreciation of the local currency against the United States dollar has been highly correlated to the increase in inflation since 2019, we hypothesised that exchange rate volatility would consume the impact of inflation in explaining stock market volatility. This data was obtained from the Reserve Bank of Zimbabwe’s website and providers of implied exchange rates data.

The results of our regression largely concurred with the reasoning that went behind the assumptions in our analysis. Exchange rate volatility was the largest macro-economic driver of stock market volatility, accounting for 37,1% of total volatility. Foreign investor activity accounted for 12,3%, and inflation and liquidity accounted for 1,1% and 5,1%, respectively.

However, the combined volatility of these variables is only 46,9% instead of 55,7% because of multicollinearity between some of these variables.

We observed notable covariance between inflation and exchange rate volatility given a correlation of -0,38, as well as a covariance of 0,49 between reserve money movements and foreign investor activity.

The correlation between different variables means that some of the volatility explained by one variable is also explained by another variable because the two are related.

The high correlation between reserve movements and foreign investor activity also strongly suggests that sources of liquidity in the market are largely from the foreign side. There are many inherent assumptions in this regression analysis that can be critiqued, but these results make a compelling argument about the impact of foreign investor activity and exchange rate volatility on the ZSE’s overall volatility.

There remains almost 50% of volatility that the analysis cannot explain, and we attribute this to sector- and company-specific variables. We opine that the increased presence of retail investors has been another source of volatility especially among small cap stocks such as Willdale, Unifreight Africa and National Tyre Services. Investors can use dynamics in foreign investor trades and currency movements in gauging the overall direction of the ZSE.

Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or