THE Victoria Falls Stock Exchange (VFEX) is now in its ninth month since it was set up in October 2020. So far, the bourse has only attracted one listing. This is perhaps a world record for any stock market within the same period. The VFEX registered its first trades two weeks after its launch, yet another negative indicator. (Since the publication of the Quoted Companies Survey, an additional listing has been recorded, bringing the total to 2)
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 meaningful attention from investors, the shares of the company that listed, Seed Co International, had an initial asking price of 21,9 US cents but only sold for 18c, which was also a discount on its primary Botswana Stock Exchange listing price of 22c.
To date, no foreign participation has been registered. A number of companies initially primed to hop on to the bourse have so far not yet firmed on the move. These are early signs pointing towards a failed exchange, but before a conclusion is drawn, studies show that a period of at least five years should be used as scale over, from which a more informed assessment can be made.
(Padenga became the 2nd listing on the VFEX after its directors approved its delisting from the ZSE main board. the counter has to date, traded only two times and lost over 50% from its initial price on the respective bourse. The total value of trades in the counter over the two sessions were below US$10000. Padenga is a producer and marketer of crocodile skin and gold. It is an Innscor spinoff and was one of the best performing companies by financials matrics on the ZSE over the last decade).
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 listed below within the first 20 years of bourse establishment.
Researchers measured performance at a 16-20year 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 economy as a whole).
De Sousa et al’s research results imply that the number of listings and turnover ratio correlate with performance of a bourse. 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 a 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 three Key Performance Indicators’ (KPI) 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 level 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 the sense that it informs a more reliable conclusion to be reached. It is also clear that the timeline for the review of the VFEX at this point is short of the timeline prescribed in the study cited 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 Seed Co 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 negative picture to the rest of the world with regards to the rule of law, policy consistency, property rights and other 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 listing capitalising on the expected few forced listings. As with anything in the capital markets, timing is important.
A month ago, Coinbase, an exchange for cryptocurrency listed on the Nasdaq. It soon generated more interest and investors pushed its Initial Public Offering (IPO) price beyond its reference price of US$250 to close its first day of trading at US$381. The listing of came at a time when the cryptocurrency revolution has 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, barely 12 years after another ban at the height of hyperinflation when 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 tilted against its success.
The two, which are Old Mutual and PPC, could have been thought of as low-hanging targets, but their reluctance to hop onto the VFEX shows very low confidence from issuers of securities; even as there may be low confidence from the investing public.
The fact that the management of VFEX remains the same with 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 macroenvironment that attracts savings and investments.
It further has to look at technical aspects to spruce up the image and operational aspects of the bourse to entice issuers of securities, who are mainly on the sidelines engaging a wait-and-see attitude. Some of the considerations that will need to be made to increase the allure of the VFEX, include separating the Victoria Falls town as a standalone jurisdiction in terms of taxation and exchange control regulation.
The move is tantamount to de-risking the Victoria Falls, which would increase investor appeal. The bourse may also look at partnering leading exchanges such the Johannesburg Stock Exchange (JSE) or London Stock Exchange (LSE) through management contracts.
Recently, government instituted measures to sweeten the VFEX through legislation adjustments. Exporters who list on the VFEX will retain 100% of their export earnings on incremental volumes above their average monthly volumes over a predetermined period.
This is almost an equivalent of the yester year export incentive. While this would be a positive in a normal economy where exchange rates clearly mirror the fundamentals and market forces, in the case of Zimbabwe, it is not a positive and thus will, in my view, do little to entice new listings on the VFEX. In terms of value, exporters are losing between 12% and 15% on export receipts surrender to RBZ given the disparity between the interbank and the parallel market rates.
The rate of loss widens with the widening of the variance. Given the 50% premium on parallel market rates, exporters’ losses in the current year are likely to go up as much as 20%. Now what happens when exporters increase their production volumes beyond the current average? They gain retention and thus reduce the loss suffered on the primary and larger production share highlighted above. A key thing to note is that the loss does not go away but rather it reduces.
So for a company listed on the VFEX, it will have to increase production levels first above its normal levels, which is not an easy thing to do. Some of these adjustments may require more capital investment. It may also mean adjusting the current production processes at a cost.
The government has to adjust policies of fundamental nature such as economic readjustments to foster sustainable capital markets growth.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com