18 September 2017

Zimbabwe: Money Supply, Inflation Fears the Only Fundamentals That Matter in ZSE's Record Bull Run

Photo: Financial Gazette
Zimbabwe Stock Exchange.

The Zimbabwe Stock Exchange is soaring, reaching new records each day. Last week alone, the market capitalisation added $3,2 billion to close at $11,3 billion as demand for equities soars.

Gone are the days when the common sentiment was "Zimbabwean shares are undervalued". ZSE is now overvalued despite the challenges companies are facing which include foreign payment delays and waning aggregate demand, just to mention a few.

Year to date, the mainstream index gained 176,96 percent to 400,05 points, driven mainly by the biggest 10 stocks by market capitalisation which account for 77,4 percent of the total market capitalisation.

The mining index has also picked up 56,32 percent in a year to date to 91,46 points, as demand for all mining companies increase.

Markets observe fundamentals - which gives rise to a question - which fundamental is ZSE respecting?.

"Money supply!," analysts have this general consensus.

Analysts say the demand for equities is driven mainly the issuance of treasury bills into the market by government, which is giving rise to creation of phoney money in the economy through Real Time Gross Settlement (RTGS).

Banks are holding on to $7 billion in unsupported electronic balances, putting their health at risk.

RTGS payments accounted for 71,87 percent of the total value of transactions processed through the national payment system (NPS) in the week to September 1, according to RBZ statistics.

The market capitalisation to GDP ratio, a guide of the market is under/overvalued, indicates that ZSE is now overvalued, but analysts concur that the bull run will continue.

Zimbabwe's GDP stood at $16,29 billion in 2016, according to the World Bank. This implies that the market capitalisation to GDP ratio is now around 63 percent.

In 2011, when the economy showed some signs of recovery, with capacity utilisation reaching a peak 57,2 percent, the market capitalisation to GDP ratio stood at 34 percent.

"Listed companies represent less than 50 percent of total companies in Zimbabwe, but the market capitalisation is now heading towards a one to one ratio (1:1) with the country's GDP, which shows that the market is overvalued.Traditionally the market capitalisation to GDP ratio was between 40-50 percent, which was a fair representation" an analyst with a leading asset management firm said.

Zimbabwe has many big companies that are not listed locally but contribute significantly to GDP. But, without their contribution, the ZSE market capitalisation on its own is creeping towards the total GDP.

"Local investors are driving the current ZSE bull run, in particular, institutional investors who have excess cash in banks, as they prefer equities to money markets due to currency risk fueled by the heavily discounted bond notes and RTGS balances," said an equities analyst.

The rising RTGS balances, compared to USD cash and Nostro balances have pushed up premiums on dollar notes, driving inflationary expectations.

"The real reason is that we are anticipating a high inflationary environment, so for you to protect yourself against an inflationary environment, you need to hold real assets, that's why there is now demand for real assets like equities," said the analyst.

"The creation of money is very high at the moment, so investors are running away from holding monetary assets to real assets, thereby creating the demand which is pushing share prices upwards.

"The problem with money markets investment is that their returns will be chewed by inflation, but with shares investors preserve value, and can be liquidated at a later date in the long run at a price which reflects the inflation rate at that time."

Some analysts said corporates are now turning to the stock market in order to hedge themselves against the potential risks associated with sitting on top of excess cash in banks.

"Corporates are being paid large amounts by the government through treasury bills or by RTGS. So rather than holding on to large RTGS balances, they turn to either equities or properties, but most of them are going for equities because of issues of divisibility as equities allow them to diversify their portfolio compared to properties where you commit larges amounts on a single asset," an investment analyst said.

The RTGS balances are also difficult to liquidate, analysts say. Last week ProPlastics finance director, Pascal Changunda said it often takes up to three months to liquidate RTGS balances, stretching their resources to the limit.

Foreign investors, on the other hand, are pulling out of the local bourse in drives and remain net sellers in the year.

Notwithstanding the difficulty in remitting sale proceeds, driven by Nostro pressures, foreign investors are opting to sell and reserve better positions in the remitting queue.

"Foreigners are considering that even if they are to wait in the queue for months to receive their proceeds, they will eventually get paid in US dollars when their turn comes ... . and there is also fear that the ongoing bull run might retrace if the uncertainty driving the market cools down," an analyst said.

The central bank last week said it had set up a $5 million Zimbabwe Portfolio Investment Fund to repatriate funds to foreign investors specifically on the Zimbabwe Stock Exchange (ZSE), a development meant to restore confidence in the market.

As at June the country had a backlog of $75 million in dividends and proceeds from sales that were owed to foreign investors.

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