Flight from cash drives Zimbabwe bull market

Flight from cash drives Zimbabwe bull market
Published: 14 September 2017
THE Zimbabwe Stock Exchange (ZSE)'s market capitalisation galloped to a record $8 billion last week, less than two weeks after it had struck another record at $6 billion. This week, the bourse maintained the northward course, skyrocketing to a record high.

Yet there is no thrill coming out of the current bull market. If it were elsewhere in an economy showing signs of expansion, champagne corks would be popping every day, and investors would be feeling pretty good. But they are not. Analysts and commentators said the bull market is being propelled by fear, a fact bourse executives acknowledged this week. "The bidding wars have blown away fundamentals," said Simbarashe Mangwendeza, a research analyst with Old Mutual Securities.

"Share prices no longer reflect the fundamental value of companies." Mangwendeza said people no longer wanted to keep holding cash in bank accounts. "Even now, some property sellers are not accepting local bank transfers," he said. Martin Matanda, the acting chief executive officer (CEO) of the ZSE, said while the bourse had indeed witnessed significant growth in the mainstream index of over 108 percent year-to-date by Friday last week, and market cap surged above $8 billion, this was a worrying sign of lack of confidence in the broader economy.

"The ZSE believes the rally is on account of rising money supply and expectations of higher inflation," said Matanda. "The ZSE's view is that investors are showing their confidence in the market's ability to preserve real value in the face of heightened inflation expectations by investing more in listed securities," he pointed out. During the hyperinflationary crisis that ended with dollarization in 2009, the bourse hit record highs year after year, emerging as the best performing stock market on the continent in US dollar terms. Yet that performance simply camouflaged an economy that was on the death bed.

Between 2000 and 2008, sustained and broad-based decline led to a cumulative contraction of nearly 50,3 percent in real gross domestic product (GDP). Investors fled to stocks, foreign currency and real estate to escape from a defenceless Zimbabwe dollar, which suffered a hourly erosion of value due to increased money printing. That ended in 2009 when Zimbabwe ditched the local unit to embrace a hard currency regime that brought stability to the economy.

The printing press became derelict, and a coalition government, formed to end a political crisis precipitated by a disputed election, managed to a large extent to rein-in profligacy. Under Tendai Biti, Treasury adopted a policy touted as weeat-what-we-kill, under which government spent only that it collected in the form of revenue. The economy burst into a post-hyperinflation rebound, registering average growth of seven percent, while inflation was confined to low single digit levels. The ZSE bubble burst, and the bourse became a pale shadow of the crisis-era performance.

But following the collapse of the inclusive government in 2013, GDP growth decelerated from 10,5 percent in 2012 to 4,5 percent in 2013 and three percent in 2014. Economic growth decelerated further to 1,4 percent in 2015 and to 0,7 percent last year. Fiscal distress also intensified after the collapse of the coalition government, and government began resorting to increased borrowing on the domestic market, crowing out the private sector.


Later on, the central bank began printing money through the real time gross settlement system (RTGS) to fund government deficits, replacing hard currency in the banking sector with an RTGS currency it pretended was equal and similar to US dollar balances held in bank accounts. Soon, the country ran out of bank notes, and investors who could not move the RTGS cash out of banks panicked back to the stock market.

Those with real estate that had been earmarked for sale have decided to hold on to their properties. Mangwendeza said the development was disturbing, but called on central government and other stakeholders to rethink policies. "It's worrying if people are running away from holding money in their bank accounts," he said. US dollars, the alternative to real estate, have also become pricey, with a premium of at least 35 percent for purchases done with RTGS transfers. In November, the Reserve Bank of Zimbabwe (RBZ) introduced bond notes to deal with the shortage of bank notes. To many, that immediately signalled the return of the Zimbabwe dollar, triggering the resurgence of inflation.

Annual headline inflation rate, which had been in deflation since September 2014, moved into positive territory in February 2017, coming in at 0,06 percent, before quickening to 0,75 percent in May. The rate has since slowed down to 0,14 percent as of July, but the International Monetary Fund (IMF) this week warned inflation could reach 7 percent by December. RBZ governor, John Mangudya, admitted inflationary pressure was a result of the expansionary fiscal policy stance, which saw the fiscal deficit rising to $1,4 billion in 2016, from a projected $150 million.

The out-turn was at nearly 10 percent of GDP. That, inevitably, has resulted in high money supply, which has, in turn, fuelled real inflation and high inflation expectations. The major problem, apparently, has been that government deficits have been financed largely using domestic sources, mainly through the issuance of Treasury Bills (TBs) and an RBZ overdraft facility. "This increased the quantity of money in circulation," said Mangudya.

"These expectations result in investors needing to hedge against the anticipated loss of value and real estate and listed securities become natural options," said Matanda. He added: "Given the better liquidity of listed securities over the property market, it is therefore expected that more funds are channelled into stocks. This has been reinforced by the challenges in getting cash out of the banks as well as challenges in external remittances."

The irony is that, while there has been a surge on the ZSE, foreigners are pulling out in droves. Matanda admits that foreign investors now view the ZSE as "less attractive due to challenges in remitting dividends and proceeds of shares sold". "These challenges have had the effect of creating uncertainty and on the basis of these circumstances we have witnessed a net sell position for foreigners since beginning of 2016," he said. The RBZ recently set up a fund to enable the repatriation of dividends by foreign investors. The fund is not yet operational.

Matanda hopes that when the fund becomes operational, it will assist in restoring foreign investor confidence on the bourse. The last time Zimbabwe faced a similar crisis, foreign investors bought fungible Old Mutual shares, which they sold either on the London Stock Exchange (LSE) or on the Johannesburg Securities Exchange (JSE) to repatriate dividends of cash from equities disposals. The Old Mutual share price has been trading at a premium compared to the share price in London or Johannesburg, suggesting it may have suddenly become a conduit for cash repatriation.

On Tuesday, Old Mutual traded at $5,53 on the ZSE, more than double its London and Johannesburg prices of 200,55 pence ($2,66) and 34,69 rand ($2,66), respectively. But Matanda noted that, unlike 10 years ago, the current trend has seen Old Mutual shares being moved from the foreign bourses to the Zimbabwe register. "If foreign investors have been taking advantage of fungibility (of Old Mutual shares) to repatriate dividends, we would be seeing the movement through requests to transfer the shares out of the Zimbabwe register to either the South African register or UK register.

That trend is not evident and as a matter of fact there is a noticeable increase in the number of inward transfer of Old Mutual from external registers to the Zimbabwe register," he said. The reason, Matanda suggested, was that the Old Mutual share was trading at a significant premium on the ZSE compare to the JSE or LSE. Apparently, since foreign currency challenges crept into the economy in February last year, there have been net foreign sales on the bourse. Although the fund for the repatriation of dividends and other foreign commitments emanating from the bourse has not yet become operational, Matanda reckons foreign investors are selling so that when it becomes operational, they will be at the front of the payment queue. 
- fingaz
Tags: Cash, Bullmarket,


Latest News

Latest Published Reports

Latest jobs