Zimbabwe: Hot Money Behind ZSE's Enigmatic Surge

Zimbabwe's economy enjoyed rapid growth since implementation of the Global Political Agreement, which paved way for a unity government and the introduction of a multi-currency system that allowed the country to use a basket of foreign currencies as legal tender.

Economic growth, as measured by real GDP growth, averaged 8,5% between 2009 and 2011 before falling to 4,4% in 2012.

Of course, the high economic growth rates followed years of decline, but the almost instantaneous recovery was lauded nonetheless.

Naturally, the country's equities market, the Zimbabwe Stock Exchange (ZSE), also benefitted, achieving a cumulative return of 52,4% up to the end of 2012 as measured by the mainstream industrial index.

History from other countries that have suffered from hyperinflation such as Germany and Argentina shows that a high recovery phase is not unusual. However, these hefty growth rates are hardly sustainable and usually taper off at some point.

Last year's GDP growth rate of 4,4% heralded the end of the years of plenty and by all accounts it looks like Zimbabwe will now fly at an ordinary height. For most stock market pundits, it followed these lean times would now translate to sluggish share price performances and perhaps even a bear market.

Most were surprised, therefore, when the ZSE opened the year with a bang, defying the odds and registering what is by far the best start to any year since dollarisation.

The mainstream industrial index gained 19% in January, far ahead of comparative figures of 3,1%, 6,7% and 4,3% for January 2010, 2011 and 2012 respectively.

Initially, gains on the stock market were dismissed as a fluke and were predicted to fizzle out before long. It was when the market's top blue chips progressively scaled new highs that even naysayers started to accept the market was indeed in a rally. Counters that have so far this year achieved all-time high share prices since dollarisation include BAT, Delta, Econet and Innscor.

As usual, market watchers will try to make sense of the market's behaviour. Some have suggested that equities are responding positively to the long-awaited conclusion of the constitution-drafting process which had been outstanding for four years. They contend that this signals the arrival of a less volatile political environment.

Others refer to the so-called de-risking of Africa in general, the positive results of mitigating investment risks on the continent.

These explanations, while interesting, do not offer a believable explanation for the bullish sentiment in the market. In fact, it is more plausible that factors external to the market are responsible for the share price rally seen in January.

Developed countries' central banks' actions may well be the number one benefactor of stock markets, not only in Zimbabwe, but across emerging and frontier markets in general. Other regional exchanges with big gains in January included Nigeria, with 13,4%, Kenya with 8,3%, Ghana 6,8%, and South Africa, 3,1%.

Remember the much-touted quantitative easing by the Federal Reserve in the United States? Or the European Central Bank's unlimited bond-buying programme?

These expansionary monetary policy actions and others like them in the developed world have caused what is now being described as an all-out currency war. Simply put, faced with a shrinking world economy, industrialised countries dependent on exports have been trying to outdo each other in printing money and effectively devaluing their currencies.

The hope is that a relatively weak currency will make their exports more competitive and offset the impact of reduced demand for goods the world over.

All these billions that have been printed now have to find a home and earn a return. In the developed world, the prospects of earning a good return have dwindled. Interest rates, for example, are ultra-low, causing a massive switch from bonds to equities, a phenomenon aptly referred to as the "Great Rotation".

Emerging and frontier markets such as Zimbabwe and its stock exchange have also become an obvious place to park some of this money. Hedge-fund managers who are expected to consistently achieve a market-beating performance are especially under pressure and have to take on progressively riskier bets if they are to meet their targets. It appears it is the inflow of such monies, hedge-fund cash in search of superior returns, which has driven the ZSE's performance.

The outperformance of blue chip counters ahead of the rest of the market augurs well for this theory -- foreign investors tend to favour the blue chips as they are relatively more liquid than the rest of the market.

If the rally had been driven by an improved risk rating on the country, it would have been more broadly-based and perhaps even more pronounced in the smaller, second tier stocks. Also, the improved political environment theory can hardly be true. No matter what improvements have been made, investors are likely to view an election year with a certain measure of disquiet.

If we accept that the stock market is being driven by inflows emanating from newly-printed money from the first world's currency wars, then there is reason for concern. Inasmuch as it flows in quickly, this money is "hot" and can be moved out at very short notice. Should this happen, then the market's gains can easily be eroded in a short space of time.

By all accounts, the first world currency wars are far from over. If anything, all indications are that they will intensify. This means more hot money for emerging and frontier markets.

As long as this trend holds, and as long as Zimbabwe does not become a comparatively risky investment destination, we can expect to continue benefiting. But any instability emanating from disturbances in the upcoming constitutional referendum and elections, or the country's economic prospects, will likely lead to abrupt withdrawal of the hot money that has driven the market thus far.

On the other hand, this window of opportunity can be used to warm up investors to the idea that committing longer-term funds to Zimbabwe makes sense.

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