Last week the ruling party ZANU PF recommended the ejection of Old Mutual Limited from the Zimbabwe Stock Exchange while subsequently the government is moving to delist the counter together with other dual listings and to another yet to be established stock market. This recommendation comes at a point in time when government has halted the entire trading activity on the main board, now in week 3. The only other time the stock market was halted was in November 2008 at the peak of hyperinflation. Old Mutual is among 57 active counters trading on the Zimbabwe, but it is unique in that its listing on the Zimbabwe Stock Exchange is secondary as it is listed primarily on the Johannesburg Stock Exchange in South Africa.
For starters one thing that escapes most commentators on the dynamics around Old Mutual’s trading on the Zimbabwe Stock Exchange is that the Old Mutual which is listed on the ZSE is not Old Mutual Zimbabwe but its parent Old Mutual Limited which is headquartered in South Africa. It also escapes many that Old Mutual then known as Plc terminated its primary listing on the London Stock Exchange in 2016, delisted in all the markets it had listings and immediately relisted primarily on the Johannesburg Stock Exchange and on Zimbabwe Stock Exchange among other secondary markets including London Stock Exchange as Old Mutual Limited in that respective year. These changes were in line with the group’s thrust to refocus on Africa, which is where its roots are and also its largest market. By listing in several markets Old Mutual has been able to spread its shareholding across different markets. This has also allowed respective capital markets in which the company has operations to enjoy the benefits of diversification and risk spread given the geographical spread over which the underlying asset (operations) is spread. So by listing in various markets Old Mutual has empowered the respective economies where it maintains a listing while deepening respective capital markets for the benefits of locals. Due to its diversification in different markets, at least 15, in Africa and significant exposure in one of Africa’s biggest economy, SA, Old Mutual is typically a rare gem and blue chip with stable earnings which provides investors across the region with stable dividends and capital appreciation. It is very difficult to find any listed stock across the regional exchanges with unique features such as those inherent in the Old Mutual counter. It is time Zimbabwe realise that the listing of Old Mutual Limited on the ZSE benefits Zimbabweans more than it does the company. The market is starved of new listing, neither does it really have the capacity to raise hard currency in capital raises. Old Mutual, for the purposes of listing, can simply do without Zimbabwe.
For a bit of perspective on dual listings, all operating companies carry issued or outstanding shares which refer to the total number of shares currently held by shareholders. For example, a hypothetical company A holds 1000 total issued shares and in total has 100 shareholders with equal shareholding. This would mean each of the shareholders hold 10 shares. Now suppose company A is a dual listed company and that it has listing in 4 countries (4 stock exchanges) and that each markets has a share register equivalent to 25% of the company’s issued shares. It would follow that on each of the 4 exchanges’ register there are 250 shares of company A being traded. This process of splitting outstanding shares in different markets is what is known as dual listing. One feature of dual listing is that it allows for free movement of shares between markets, which is known as full fungibility. So holders of shares in company A in market 1 can freely sell the shares in a different market 2. This free movement of shares or full fungibility ensures that the impact of exchange rate differential is eliminated in establishing the fair or intrinsic value of the dual listed counter.
Without fungibility, a share of the same company traded in different markets will not carry the same value since inherent country specific risks can either inflate or deflate the price relative to countries which do not restrict movement.
Now taking Old Mutual into perspective, the stock just like any other listed on the ZSE, has been subjected to some country specific risks reflected through the currency. Rationale and risk averse investors have factored the impact of inflation and exchange rate loss as part of macro-economic fundamentals factoring in coming up with stock valuation. The overall stock market has rallied strongly since the beginning of the year, notching over 600% in ZWL$ terms and over 100% in US$ terms. Old Mutual in turn has rallied only 150% over the same period in ZWL$ terms. Going by this statistic, it would follow that demand for stocks on the ZSE has generally been higher than Old Mutual share demand in 2020. It is therefore not wiser to deduce that Old Mutual share rally seen at a conservative rate to overall market is the driver of exchange rate depreciation. In the least, trading activity in the counter cannot be dubbed speculative as it lagged the overall market in the period from January 2020 to end of June. Fundamentally the rally in stocks is traced to increased liquidity in the market which spurs demand and subsequently prices. In 2020, money supply as measured through reserve money has so far grown by about 30% while over 2019, reserve money grew by a staggering 350%.
Looked at differently, suppose Old Mutual is ejected from the stock market and the stock market maintains its strong rally it would follow that the stock market would create significant monetary values from stocks appreciation sufficing to push the rate as selloffs are consolidated to hard currency. Practically, the value of stock market companies on the ZSE has soared from $29.8 billion in January to $228.7 billion as at end of June 2020. This means almost $200 billion in monetary value was created via the stock market in the 6 months period to June. Now assume this additional growth in values is realised through share disposals, it overall increase liquidity in the economy and puts pressure on the exchange rate as investors look to solidify their stock market realised gains through hard currency. So in essence, with or without Old Mutual, weak underlying economic fundamentals can potentially continue to spur stock market gains and in turn drive exchange rate depreciation.
Now assuming Old Mutual is delisted, it means out of its ZWL$5 billion in market cap, a significant fraction will have to be disposed. Recouping at least 50% of this will mean demand for other stocks will significantly shoot as investors seek alternative home for their capital, mostly local shareholders. For foreigners, the likely scenario is wanting out and this immediately puts pressure on the interbank rate. So critically, the narrative around stabilising the exchange rate should focus more on the underlying factors weakening the economy not on the symptoms such as the OMIR. Forgoing the listing of Old Mutual completely has the implication of denting the country’s image as an investments destination. It also reduces scope for investments and depth of local equities market. In the long run it works against the country’s allure as a safe investments destination.