HomeOpinionA flight to safety on the ZSE

A flight to safety on the ZSE

Tafara Mtutu Research analyst

THE first half of the month of October was marked by a bull run on the Zimbabwe Stock Exchange (ZSE) as the ZSE All-Share Index (ASI) picked up 24% between October 1 and 19, 2021.

Top movers on the exchange were blue chips Delta (25% month-to-date), Innscor (33%), OK Zimbabwe (44%), Econet (46%), and SeedCo Limited (33%). Other counters of note were National Foods which doubled to ZW$1 647,15 (US$18,30) per share and BAT Zimbabwe which moved ahead by 44% in the first half of October.

The bull run was likely prompted by the crackdown on parallel market activity by the Reserve Bank of Zimbabwe in a phenomenon known as flight-to-safety.

Flight-to-safety is a rush by investors to preserve value in assets that are prime hedges against rising risks that affect the value on their investments. This is often observed during periods of recession, when stock prices falter and the price of gold — a globally accepted prime hedge against inflation — rallies because of a swift change in investors’ portfolios.

This was apparent in the first quarter of 2020 when the price of gold rallied above US$1 800 per ounce, its highest since 2011, and the S&P 500 Index slid by 23% following early reports of the exponential spread of Covid-19.

Flight-to-safety is also frequent among emerging markets. When emerging market investors perceive an increase in emerging markets risk, they divest from emerging markets and back to more developed economies such as Europe and the United States.

This has been the case with South Africa in recent years. The southern African nation’s risk profile has steadily worsened in the last five years, and its sovereign credit rating was downgraded by all three global ratings agencies in 2020.

The most glaring response to these developments by international investors was a net foreign selloff of South African stocks of R125,6 billion (US$8,64 billion) in 2020 and an estimated R87,13 billion (US$6 billion) in 2021 in an exodus to safer investment destinations.

The ZSE has also been experiencing a similar selloff by foreigners since August 2020, when the bourse resumed trading shortly after the interbank auction system began allocating a portion of foreign currency to disinvestments by international investors.

In most cases, the decreased appetite for emerging market currencies in favour of stable currencies drives the depreciation of these emerging markets’ currencies against the US dollar and Euro.

In Zimbabwe, flight-to-safety takes a unique twist because of country-specific challenges. Firstly, it is incredibly difficult for holders of Zimbabwe’s local currency to legally move their funds out of the currency because of a very high sovereign risk profile as well as indications that the currency is grossly overvalued at the official exchange rate.

As a result, holders of the Zimbabwean dollar cannot invest in offshore hedging instruments such as gold and gold ETFs in international markets and they are limited to (i) purchasing US dollar on both the formal and informal markets; (ii) purchasing property — another good hedging asset — from sellers willing to take Zimdollar as payment; and (iii) investing their Zimdollar balances on the ZSE.

The latest crackdown on parallel market dealers by the central bank has been a huge deterrent to parallel market transactions throughout the month, while the US$50 weekly allocation in the formal markets remains insufficient for the average citizen’s needs.

Further, the massive capital requirement needed to purchase property, whether in Zimdollars or US dollars, severely limits the average Zimbabwean’s ability to hedge value through real estate. Consequently, the stock market becomes the best alternative to hedge against loss of value for anyone holding the Zimdollar, which could explain the influx of liquidity on the bourse in October.

However, the downside of having the stock market as the only hedging alternative is the culmination of a bubble. A bubble, in investment lingo, presents itself after a rapid escalation the price of assets that is driven by exogenous market forces.

Bubbles result in stocks trading at a price, or within a price range, that greatly exceeds the listed entity’s intrinsic value. This quick rise in share prices is often followed by a quick correction which is sometimes referred to as a “crash” or a “bubble burst”.

We opine that the stock market is in a bubble because of the need to store value amid resurgent future inflation expectations and speculation of further currency depreciation on the parallel market.

We also note that October has historically been a month marked with high trade volumes on the Zimbabwe Stock Exchange and the bourse usually recedes in the subsequent months to December because of the Holiday Effect.

However, other experts of the opinion that the stock market has been undervalued and it is simply re-rating to reflect current fair values of listed equities, in which case the bourse will maintain its upward trend until it reaches a market-wide accepted consensus of fair value.

That said, investors should consider taking profit on some counters that are too hot on the bourse.

  • Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.

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