RUN ON ZIM STOCK EXCHANGE COULD BE SIGN OF COLLAPSE
Investors are buying blindly on thin volumes in search of inflation hedges
ZIMBABWE’S worsening cash crisis and fears over the erosion of value of bank balances has proved a boon for the local bourse as individual and corporate investors seek refuge there.
The Zimbabwe Stock Exchange (ZSE) reached its highest post-US dollar adoption, after capping the month of August on the front foot as bulls continued to drive the indices higher. With the previous highest level set on August 1, 2013 – the day after Zimbabwe’s last general election – it looks like there is no end to the bourse’s recordsetting performance.
The market capitalisation increased by 39% to close at $11.3 billion from $8.12bn in the previous week, mirroring the gains in both indices.
Total market turnover rose nearly threefold to $27.99 million from $10.64m recorded in the previous week.
Many investors are buying blindly on very thin volumes, a situation analysts warned “is technically not sustainable” amid concern that the market has now overheated.
Analysts say the demand for equities is driven mainly by the issuance of treasury bills (TBs) into the market by government, which is giving rise to the creation of phoney money in the economy through real time gross settlement (RTGS).
Economist Ngoni Mguni said the surge in equities is largely driven by local institutional investors seeking an inflation hedge that is provided by equities or property.
“Institutional investors who have excess cash in banks are driving the current ZSE bull run as they prefer equities to money markets due to currency risk fuelled by the heavily discounted bond notes and RTGS balances,” Mguni said.
Monetary developments – increasing RTGS balances relative to US dollar cash and Nostro balances, which have pushed up premiums on US dollar notes – continue to drive inflationary expectations.
“The real reason is that we are anticipating a high inflation environment, so for you to protect yourself, you need to hold real assets. That’s why there is now a demand for equities,” he said.
“The problem with money markets investment is their returns will be chewed up by inflation, but with shares, investors preserve value, and can be liquidated at a later date in the long run at a price which reflects the inflation rate at that time.”
Said one investment analyst: “Government is paying through treasury bills and is just creating money through RTGs and that is one of the major factors causing the bull run on the market as investors and corporates dispose of the big RTGS balances they hold by buying shares on the stock market.”
Foreign investors, on the other hand, are intensifying their disposal of their shares on the local bourse as they remain net sellers in the year.
Despite the difficulty in remitting sale proceeds, driven by Nostro pressures, foreign investors are opting to sell and reserve better positions in the remitting queue.
“Foreigners are considering that even if they are to wait in the queue for months to receive their proceeds, they will eventually get paid in US dollars when their turn comes. There is also fear that the ongoing bull run might retrace if the uncertainty driving the market cools down,” an analyst said.
However, the central bank has established a Zimbabwe Portfolio Investment Fund to the tune of $5m, to facilitate the efficient repatriation of portfolio related funds to foreign investors invested specifically on the ZSE, a development meant to restore confidence in the market.
In June, the country had a backlog of $75m in dividends and proceeds from sales that were owed to foreign investors.
Interestingly, the demand for shares is not limited to those dually listed on either the JSE or the London Stock Exchange. Fungible shares attract more investors as one can dispose of the same shares in either Johannesburg or London.
“But even penny stocks are being grabbed in their millions,” said an equities analyst who asked not to be named. Some analysts said corporates are now turning to the stock market in order to hedge themselves against the potential risks associated with sitting on top of excess cash in banks.
Gone are the days when the common sentiment was that Zimbabwean shares were undervalued.
“The ZSE is now overvalued despite the challenges companies are facing, which include foreign payment delays and waning aggregate demand, just to mention a few,” said Mguni.
To date, the mainstream index gained 176.96% to 400.05 points, driven mainly by the biggest 10 stocks by market capitalisation which account for 77.4% of the total market capitalisation.
The mining index has also picked up 56.32% in a year to date to 91.46 points, as demand for all mining companies increase.
But instead of bringing cheer and celebration, the bullrun is bringing fear, and an uncomfortable sense of déjà vu.
“In 2007, just like today, the ZSE became the world’s best performing market. Shares were up close to 600% by mid-year in 2007. Year-on-year, by April 2007, the stock market had risen a massive 12 000%. We now know it was all a deception; it was only going up because investors had nowhere else to put their Zimbabwe dollars, whose worth was evaporating fast,” said Mguni.
“Unless something is done, and differently, so will the signs now in 2017 lead the economy, and the politics, into similar trouble in 2018.”
OVERHEATED: Members of the media discuss a screen at Zimbabwe’s Stock Exchange in Harare. The mainstream index has gained 176.96% to 400.05 points, driven mainly by the biggest 10 stocks by market capitalisation.