The Zimbabwe Industrial Index, which is the main index on the exchange that contains every company except for a handful of mining stocks, is up almost 69 percent on the year in US dollar terms. The next best stock market, Latvia's OMX Riga, is up a mere 52 percent on the year making Zimbabwe the runaway leader of 2017 so far. Since the index itself is denominated in US dollars, its performance has come without the currency boost that many other indices in 2017 have benefited from.
The Zimbabwe Stock Exchange's impressive run this year has come from a low base. It started the year with a market capitalization of just under $4,3 billion and is worth just over $6,7 billion now. In comparison, News Corp, the smallest company on the S&P 500 in the US, has a market capitalization of $7,9 billion by itself. However, this still marks an all-time high in the index since Zimbabwe switched back to using the US dollars in 2008.
Broad Rally Across The Zimbabwe Stock Exchange
The index contains 58 different companies and the performance this year has not been isolated to a few names. On average, each company has gained over 87 percent on the year. CFI Holdings, a company engaged in various activities including retail, property, and poultry, has led the way with a 606 percent gain on the year! The company has also been buoyed by shareholder squabbles that has seen them try outbidding each other as the battle for control escalated. As a result a mandatory offer of 22 cents per share was rendered academic.
But the gains would all be for naught without the strong performance of Delta Corporation, the largest stock on the exchange by market cap with a 26 percent weighting on the index.
Delta Corporation is the largest brewer and beverage distributor in the country. However, it recently announced 10 percent lower revenues than last year, and it has been unable to pay dividends due to a cash crunch affecting all of Zimbabwe. Yet the stock has gained 61 percent on the year.
At the companies AGM held in July, CEO Pearson Gowero said the company was sitting on approximately $40 million owed to the major shareholder AB Inbev.
So if stocks are rallying despite worsening financial results, what is driving the rally?
Cash Shortages Dominating The Market
While official inflation is almost non-existent according to the latest government results, there are massive cash shortages facing the entire market with US dollars in short supply. Zimbabwe already uses many different methods to stretch the US dollars they do have as much as they can.
One way is by introducing real time gross settlement transfers (RTGS), creating an electronic currency market that is used by many individuals. However, dollars on RTGS no longer trade at par with real US dollars, and was quoted at a 35 percent discount recently with withdrawal wait times measured in weeks.
Bond notes were also introduced in November 2016 in an attempt to find greater US dollar liquidity, backed by an offshore fund. However, these notes soon traded with a discount as well as mistrust permeates the system, and many investors and banks are trying to reduce exposure to them. The risk of default on these bond notes is growing by the day.
When Cash Is Not King, Equities Become A Safe-Haven
That is why stocks have stormed higher despite paltry revenue growth and frozen dividend payments. In a market where government paper and the currency itself is suspect and declining in value, equities have taken on safe-haven status with many investors rotating their money into equity allocations.
We are seeing similar price action in Venezuela where the currency has devalued from hyperinflation. Despite Zimbabwe officially operating in US dollars, the growing amount of US dollars Bond Notes outstanding has circumvented dollarization efforts and stocks are the main beneficiary. Just know that it is unlikely that any foreigners will be able to get US dollars back out of the market anytime soon.
Meanwhile the Securities Exchange Commission of Zimbabwe (SECZ) has said the sustained rally on the Zimbabwe Stock Exchange is due to high amounts of RTGs money that has been pumped into the economy by Government through debt assumption.
Addressing journalists attending a workshop on Financial Reporting in Kadoma yesterday, SECZ surveillance and risk manager Mr Noel Mahombera said although the rally could be attributed to a number of market factors, RTGS money remains the major driver.
"The debt assumption bill saw a lot of liquidity being injected into the system," said Mr Mahombera. "Now, this is RTGS money and it has to find a home. People can buy property locally but they can't import anything because the money is locked into the system. Part of the money (consequently) gets to the market."