• VFEX surpasses half the size of ZSE in market capitalization
• ZSE market capitalization at the end of February 2023, translates to US$2.6 billion based on the interbank rate and US$2.1 billion based on the parallel market
• At the end of February, the total market capitalization on VFEX closed at US$1.1 billion, which is a growth of 107% from the end of November record.

Harare - The Victoria Falls Exchange (VFEX), which was formerly created as a subsidiary of the primary bourse, the Zimbabwe Stock Exchange (ZSE), has gradually gone up the ranks to surpass half the size of ZSE in market capitalization.

The VFEX was initially created to attract new listings which met a specified threshold of foreign currency-denominated revenues. However, the plan backfired on ZSE as companies took to their rights to delist from the ZSE and migrate to the US$-denominated market, VFEX. As was projected, this would mark the genesis of the exodus of companies from ZSE. Among other factors, the size of a stock exchange largely determines the success of the market in attracting investors, particularly foreign ones. This is because the liquidity of a stock market is positively correlated to the size of the market, and the higher the liquidity the more viable a stock exchange becomes.

Investors will be able to exercise their portfolios on a more frequent basis, and with more volumes, given the bourse is highly liquid. Therefore, it is imperative for any governing board to work on attracting more listings as well as retaining the listings. However, this is the opposite of what has been witnessed on ZSE as the introduction of the VFEX meant a dilution of the ZSE since more companies have either already migrated or are contemplating migrating from the ZWL-denominated market.

By the end of November 2022, the ZSE boasted 49 active listings which all garnered an aggregate market capitalization of ZWL1.5 trillion. At an interbank exchange rate of ZWL654.93 at the time, this converted to US$2.3 billion while on the parallel market rate basis this would translate to US$1.7 billion. At the time, the VFEX had a total of 5 listings, with an aggregate market capitalization of US$0.54 billion which was at least 3-folds lower than the market capitalization of ZSE on both the interbank and parallel market valuations.

By the end of February 2023, listings on ZSE had dropped by 4 to 45, while the market capitalization had risen by 48% in nominal terms to ZWL2.3 trillion. The increase in nominal market capitalization, despite a reduction in listings, was driven by the inflation-induced rise in stock prices as the chase for a safe haven pushed up stock prices ahead of inflation. However, in US$ terms the ZSE market capitalization by the end of February 2023, translated to US$2.6 billion based on the interbank rate and US$2.1 billion based on the parallel market. With reference to the legal exchange rate, the WBWS rate (interbank), the ZSE market capitalization in US$ grew by 9% from the end of November to the end of February.

Meanwhile, listings on VFEX increased by 3, from 5 to 8, as 3 companies migrated from ZSE to VFEX over the period from December to February. One more listing is expected on VFEX as Axia has already delisted from the ZSE as it sets to migrate. By the end of February, the total market capitalization on VFEX closed at US$1.1 billion, which is a growth of 107% from the end of November’s record. The growth is mainly attributed to more listings on the bourse, while partially contributed by increasing stock prices as well. At US$1.1 billion market capitalization, the VFEX is now 44% the size of ZSE based on the interbank rate, and 54% the size of ZSE based on the parallel market rate which is rather seen as more realistic since the rate is driven by free market forces with no direct regulatory control.

It is imperative to note that the VFEX holds almost half the size of ZSE with only 8 listings while the ZSE flaunts 45 listings. Out of the 8 listings, 6 of them migrated from the ZSE to VFEX. The size of the ZSE, therefore, is largely negatively affected by the weak reporting currency which has been depreciating against the US$ since its launch. Among the reasons raised by companies delisting from the ZSE for a subsequent listing on VFEX is the need for a more accurate company valuation using a hard currency, which is every investor and prospective investor’s concern. By August 2018, the ZSE market capitalization was at its peak of US$12.5 billion, which was notable among other African stock markets.

Typically, the stock market and economic performance are aligned. Thus, when the stock market is attracting more listings, it is usually a function of a growing economy. In perspective, the Johannesburg Stock Exchange (JSE), which is the biggest stock market in Africa and the 17th biggest in the world, is seen as one of the safest stock markets to invest in due to its size which resonates with the overall economy. Typically, investments in larger stock markets are considered more conservative than investments in small stock markets or medium stock markets, potentially posing less risk in exchange for less aggressive growth potential. Therefore, the smaller a stock market gets, the riskier it becomes as it resonates with a recession in the overall economy in most cases.

On the upside, the ZSE still ranks among the top 15 biggest stock exchanges in Africa, and the second-best performing bourse on a year-to-date return basis in US$ terms in Africa. Given stable economic fundamentals which would mean proper company valuation and company operations, the ZSE has the muscles to reign in the top 5 biggest stock exchanges in Africa. The sell-off would be the lagging performance that comes with economic stability since the current staggering performance on ZSE is premised on the very high volatility level in the country.

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