· ZSE up 95% YTD in nominal terms
· US$ growth trailing at 46% as ZWL sheds off -25%
· Market size remains a constraint to huge investors
Harare - The highly volatile financial market, Zimbabwe Stock Exchange (ZSE), has once again emerged the best performing bourse in Africa on a year-to-date basis, in US$ terms. As at the 21st of March, 2023, the market flaunted of a 46% US$ return, which is more than 1-fold that of Malawi Stock Exchange which currently sits at the second positive having garnered 21% gains since the beginning of the year.
The ZSE emerged the best performing bourse on a YTD basis in US$ terms in the world in 2020 and 2021 respectively, following rampant inflation in the country which was stimulated by a rapid growing money supply. The growing local money supply in the country, at a time the use of foreign currency was forcibly minimalized, led to limited investment options for ZW$ holders who were seeking a safe haven. The local currency has been depreciating against the US$ on a daily basis on the formal currency market, which renders it too fragile to hold onto for a prolonged time. This has stimulated the demand for other liquid assets in place of ZW$, which include exchanging the fragile currency for a hard currency, particularly the US$, or alternatively participate on the stock market.
The need to dispose of the ZW$ has seen a growing demand for the greenback and for ZWL stocks. Consequently, the price of getting the greenback continues to rise as demand increases, and likewise, the price of getting stocks on ZSE has also been on an uptick. In the first half of 2022, the Central Bank introduced a contractionary monetary policy which saw heightened efforts of mopping up excess liquidity in the economy. The pinning down of money supply getting into the second half of 2022 saw a reduced demand of the aforementioned safe havens, and a slow-down in both exchange rate loss and inflation. Since the ZSE is largely driven by speculation and sentiment more than company fundamentals, the bourse witnessed a bloodbath in the second half of 2022 following the stringent measures from the government.
However, in the 2023 monetary policy, the Central Bank partially loosed some measures which saw a revamped growth in money supply. Resultantly, the ZSE started recovering from prior year losses until it entered a bull-run zone after surpassing prior year levels. Since the beginning of 2023, the mainstream ZSE All Share Index has surged by 95% in nominal terms as of Tuesday, the 21st of March, and this converts to a growth of 46% in US$ terms. In perspective, if you invested ZW$100,000 on the first of January, 2023, you would now be boasting of a total portfolio of ZW$195,000. However, to deduce the real value growth in a stable currency, it is imperative to take into consideration exchange rate movements. The ZW$ has depreciated by -25% against the US$ since the beginning of the year. This means the nominal value of ZW$195,000 expressed in real terms would have to be discounted by -25% which leaves you with an exchange loss of ZW$48,750 and an adjusted real value of ZW$146,250. The movement from ZW$100,000 to ZW$146,250 represents a growth of 46% in real terms. Therefore, if one had converted an equivalence of US$10,000 and invested on ZSE, they would be walking away with a return on investment of US$4,625 as of now, before adjusting for tax and transactional charges.
However, while the bourse is considered the best performing on a US$ based year-to-date returns, it is imperative to factor in other yardsticks in measuring the efficiency and effectiveness of the bourse. The ZSE boasts of a total market capitalization of ZW$2.3 trillion, which converts to US$2.5 billion. This renders the market too small for very large investments as they would not either easily meet demand or easily liquidate. In perspective, a portfolio investment of US$250 million from a huge investor can not find its way in or out of the ZSE without shaking the market, as opposed to other stock markets like the JSE or the LSE. In other words, if one was contemplating of becoming an overnight millionaire by somehow investing a borrowed US$100 million and earn US$46 million, the size of the market and relative liquidity would not be permissive of that move. The market, thus, serves the investment interests of minorities. Nevertheless, the volatility level on ZSE can-not be taken lightly in an election year, as speculation and other significant uncertainties can see a total reversal of the recorded growth.
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