HARARE — The Zimbabwe Stock Exchange (ZSE) is soaring, reaching new records each day. This week alone, the market capitalisation added $3,2 billion to close at $11,3 billion as demand for equities soars.
Gone are the days when the common sentiment was “Zimbabwean shares are undervalued”.
ZSE is now overvalued despite the challenges companies are facing, which include foreign payment delays and waning aggregate demand, just to mention a few.
Year 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. Markets observe fundamentals, which gives rise to the question — which fundamental is ZSE respecting?
“Money supply!,” analysts have this general consensus.
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 creation of phoney money in the economy through real time gross settlement (RTGS).
RTGS payments accounted for 71,87% of the total value of transactions processed through the national payment system (NPS) in the week ended September 1, according to RBZ statistics.
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The market capitalisation to GDP ratio, an indicator of whether the market is under/overvalued indicates that ZSE is now overvalued and analysts concur that the bull run is likely to continue.
The gross domestic product (GDP) in Zimbabwe stood at $16,29 billion in 2016, according to World bank.
This implies that the market capitalisation to GDP ratio is now around 63%.
In 2011, when the economy showed some signs of recovery, with capacity utilisation reaching a peak 57,2%, the market capitalisation to GDP ratio stood at 34%.
“Listed companies represent less than 50% of total companies in Zimbabwe, but the market capitalisation is now heading towards a one to one ratio (1:1) with the country’s GDP, which shows that the market is overvalued. Traditionally the market capitalisation to GDP ratio was between 40-50%, which was a fair representation” an analyst with a leading asset management firm said.
Some of the unlisted companies, which contributed significantly to GDP include big companies like Zimplats and Unki, but without their share, the ZSE market capitalisation, on its own, is nearing the total GDP.
An equities analyst said the surge in equities is largely driven by local institutional investors seeking real growth component (inflation hedge) that is provided by equities.
“Local investors are driving the current ZSE bull run, in particular institutional investors who have excess cash in banks, as they prefer equities to money markets due to currency risk fuelled by the heavily discounted bond notes and RTGS balances,” an equities analyst said.
Monetary developments namely, 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 against an inflationary environment, you need to hold real assets, that’s why there is now demand for real assets like equities,” an analyst said.
“The creation of money is very high at the moment, so investors are running away from holding monetary assets to real assets, thereby creating the demand which is pushing share prices upwards , as fears of an inflationary environment looms.
“The problem with money markets investment is that their returns will be chewed by inflation, but with shares, investors preserve value, and can be liquidated on a later date in the long run at a price which reflects the inflation rate at that time.”
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.
“The bull run is also driven by corporates who have been paid the amounts they owed by the government, possibly through TBs. So rather than holding on to large RTGS balances, they turn to either equities or properties, but most of them are going for equities because of issues of divisibility as equities allow them to diversify on a number of companies as compared to properties which need a lump sum on a single asset,” an investment analyst said. “Government is paying through treasury bills [TBs] 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 the big RTGS balances they hold by buying shares on the stock market.”
Analysts added that the major fundamental that the market is observing is “money supply growth”.
“The major fundamental is money supply growth, because when you analyse a company, the first thing to consider is the macroeconomic environment, of which we all know the risks posed by the ongoing creation of money through RTGS,” an analyst said.
Foreign investors, on the other hand, are also intensifying on disposing of their shares on the local bourse as they remain net sellers in the year.
Notwithstanding 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 …. and 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 $5 million, 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.
As at June, the country had a backlog of $75 million in dividends and proceeds from sales that were owed to foreign investors. — The Source
