Investors brace for turbulence as ZSE shifts to new currency… Inter Horizon Securities sees early valuation headaches, distortions

After the ZSE’s All Share Index (ALSI) was rebased to 100 points during a drama-filled Monday to mark the first day of trade in ZiG, it gained 0,23% on Tuesday to close at 100,23 points.

ZIMBABWE Stock Exchange (ZSE) investors were this week bracing for shocks, as the bourse realigned with the new currency regime, following the introduction of a new currency on Friday that sparked market mayhem.

According to analysts at Inter Horizon (IH) Securities, valuation distortions were expected to initially unsettle markets, as they find their feet under a structured currency called ZiG, which came into effect on Friday last week.

IH did not predict how long jitters would pummel investors, as questions arise about the sustainability of a new currency.

But it said investors should seek refuge in counters offering dividend pay-out assurances.

After the ZSE’s All Share Index (ALSI) was rebased to 100 points during a drama-filled Monday to mark the first day of trade in ZiG, it gained 0,23% on Tuesday to close at 100,23 points.

In a way, IH’s predications were backed by FBC Securities, which said on Tuesday the first two days of the transition had been characterised with “thinned volumes”.

Authorities have launched a blitz to punish companies that were rejecting the Zimbabwe dollar ahead of ZiG’s launch on April 30, further confirming the depth of market uncertainties.

Friday’s announcement to launch ZiG presented new central bank governor John Mushayavanhu’s first bold step to tackle a currency crisis that has frustrated markets for 24 years.

He hoped the currency, which is backed by gold and a war chest that authorities said was enough to defend the domestic unit, would stand its ground.

The Zimbabwe dollar lost 800% of its value in 2023.

It had surrendered a further 74% by the end of the first quarter, according to IH.

“The ZSE will need to rebase to the new currency, which may result in initial distortions in valuations,” IH said in a dispatch to investors on Monday.

“The uncertainty around performance of ZiG compels us to lean more towards defensive stocks with strong dividend policies in case valuations remain distorted, impacting capital gains. In our IH universe, presenting high dividend yields are Delta (6,7%), Sambisa (5,2%) and Axia (11,2%),” it said.

In a market update released before markets kicked off under a cloud of uncertainly on Monday, the ZSE said it had recalibrated in line with Reserve Bank of Zimbabwe (RBZ) directives, converting the currency at an exchange rate of ZiG1 to ZW$2 498,7242.

It meant that as other markets battled to come to terms with the new reality, the ZSE was one of the earliest institutions to comply.

“All share prices will now be denominated in ZiG, therefore, the opening prices for the trading session effective (Monday) 08 April 2024 will reflect the ZiG currency,” the ZSE noted.

“For ease of reference, all prices will be shown in ZiG cents (ZiG price multiplied by 100).

“The price sheets for all ZSE boards, namely the Equity Board, REIT Board, and ETF Board, will be available and distributed in ZiG currency going forward.

“As stated above, for ease of reference, all prices will be shown in ZiG cents (ZiG price multiplied by 100),” the updated added.

On Thursday, Mushayavanhu had moved to calm markets through an assurance that cash piles and gold reserves were in place at the RBZ to defend the structured currency.

He spoke after inviting President Emmerson Mnangagwa to conduct a physical inspection, as he officially took over from outgoing governor, John Mangudya.

Friday’s monetary policy recalibration followed a tumultuous first quarter for the domestic unit, which also surrendered 70% on the black market.

IH sees Mushayavanhu’s measures as meant to boost demand for the local currency, “with the aim to re-anchor price and exchange rate stability and re-monetise local currency as a reliable medium of exchange and store of value”.

“The economy has been moving towards full dollarisation, with over 80% of transactions conducted in US dollars as reduced confidence in the ZWL (Zimbabwe dollar) dwindled its market share.

“Businesses are predominantly funding themselves in foreign currency, evidenced by the high proportion of foreign-currency-denominated loans in the banking sector.

“In our view, these new measures reflect efforts to preserve the current status quo in terms of the multi-currency regime and are unlikely to interfere with functioning of other currencies as they affect roughly 20% of money supply.

“The lack of further interference with foreign currency retention ratios for exporters is critical given the vulnerabilities posed by the ongoing drought and falling commodity prices.

“The requirement for 50% of quarterly payment dates (to tax authorities) to be in ZiG creates steady demand for ZiG, which should theoretically strengthen it. We, therefore, expect a relatively stable US$:ZiG rate for as long as ZiG remains anchored,” IH said.


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