COVID-19 buttered Old Mutual stock corners Zim government

  • OMIR implied rate increased due to sharper JSE losses
  • ZSE losses were deep but cut short
  • The OMIR is expected to remain adverse in Zim’s disfavour

The adverse movement in Old Mutual’s shares on the JSE in line with the global equities selloff, following the outbreak of coronavirus, has reduced the effectiveness of the government of Zimbabwe’s move to stop ZWL exchange rate depreciation through suspending fungibililty. since February 2019, the ZWL has lost almost 90% of its value against the currency it replaced, the greenback.

Almost a fortnight ago, the Minister of Finance, Professor Mthuli Ncube announced the measures through an order espoused in the government’s gazette. The order sought to ban the sell of dual listed stocks bought on the ZSE in outside jurisdictions or more precisely stock markets other than the ZSE itself.

By banning fungibility government hoped to bring down the Old Mutual Implied Rate or at least stabilize it such that it matches either the parallel rate or come down to levels near the Interbank rate. This would be achieved through selloffs as investors holding the stock for purpose of selling across the Limpopo, dump the stock. As the local price fall, the OMIR would therefore retreat closer to other rates,thus went the logic.

At the time of the proclamation, the OMIR rate was at circa 1:55 while the interbank rate was at 1:18.6 and the black market at 1:40. A week later the OMIR had barely moved despite the share price of Old Mutual plunging by almost 30% on the ZSE.

A week later, the OMIR has worsened and moved beyond the former level of 1:55 and is now in the ranges of 1:70. This means that based on Old Mutual’s share price performance on the ZSE, the ZWL should be exchanged for about 1:70 to the US dollar and Zimbabwe’s government does not want to hear this.

The fallacy of the matter is that Zimbabwe’s government failed to consider one variable which was beyond its control and this was the JSE price of Old Mutual. Generally the JSE has seen wider losses over the past 2 weeks due to a global selloff after coronavirus was identified as a global pandemic, a rare black swan which the government could not have anticipated.

The virus is expected to have a serious economic effect on the entire global economy including commodity driven emerging markets. The plunge in JSE OM share price has thus chopped ZSE OM losses resulting in neutralisation of the implied rate, before a further deeper JSE plunge drove the implied rate haywire, to Zim’s disfavour.

The ZSE has 3 main counters which also have a dual listing in other markets and these are Old Mutual, PPC and SeedCo International. Old Mutual and PPC are primary listed on the JSE in South Africa while SeedCo is primary listed on the BSE in Botswana. Investors holding these shares enjoyed the liberty to cross sell between markets before Mthuli Ncube’s intervention.

Given the fungibility and the underlying assumption that the underlying businesses represented by the shares is the same across the different markets it would hold true that the share equally hold the same underlying value in a constant currency.

This view has since brought about the idea of an implied exchange rate since the shares are sold on different exchanges using different currencies.

A stock with a share price of R100 on the JSE would also fetch for the same price in Zimbabwe such that if the ZWL price is $500, the implied exchange rate between the 2 currencies would be 1:5. Further increases in the ZWL price would therefore widen the gap and increase the exchange rate (worsen).

However government hopes that closing the fungibility gap will help improve the forex levels by curtailing outflows. Foreign investors were now resorting to fungible counters to move money from the local bourse.



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