Currency instability positions ZSE as the best performing in the region

Author Name
Tinashe W Duma
Analysis 1 month ago
  • ZSE boasts of 235.7% yearly returns as at 04/10/2021
  • Penny stocks surpass the 2000% yearly threshold gain
  • VFEX liquidity rises as RBZ pumps USD’s into the economy

The Zimbabwe Stock Exchange (ZSE) closed the year 2020 as the best performing bourse in the region, at more than 1000% annual returns in nominal terms, and has sustained the position in the year 2021 so far, flirting of 235.7% year-to-date gains. This is a weighted average of all the active counters on the exchange, with market heavies boasting 206.3% gains over the comparable period while penny stocks lead at a whooping 2049.5%. However, out of the 7 sectoral categories, the Financials sector has remained the worst performing on the bourse, weighed down by the heaviest banking stock, CBZ, which is the worst performing counter om ZSE on a year-to-date basis.

In most part of the past 9 months, ZSE has been recording sharp growths in 1 half of each month, followed by profit-taking induced sell-offs in the other half of the respective month. This is characteristic of the dominance of short-term investment on the bourse as investors fear stretching their investment period due to weak macro-economic factors in the country, with currency instability topping the fundamentals.

Since the year kicked off, ZSE has been recording gains in each respective month, and the trajectory was however halted in the prior month of August where a loss of -2.43% was posted. The stock market proved to be inflation resistant in 2020, and this stretched into 2021, as gains on the bourse sustained acceleration at a pace higher than the inflation change. On the other hand, the hyperinflation in the country was fueled by a weak currency which saw locally pegged prices chasing real commodity value in US$. In June of 2020, the Central Bank introduced the Reuters Auction system to regulate the currency market and subsequently control inflation. This proved fruitful in the 2nd quarter of 2021 as inflation slowed down to record lows in over a long time. The slow-down in inflation reflected in a slow-down in stocks as well. On the contrary, the stability in inflation meant stocks had to undergo market correction, a move seen in the red month of August were the stock market dipped to a first monthly loss in 10 months.

In the month of September, confidence in the country’s currency market dwindled again following a stretch to 100% premium between the formal and the parallel currency markets. The disparity between formal sector prices and informal sector prices raised negative sentiments in mid-September as customers buying power was expected to keep declining as well as deficits after spend. Meanwhile, the lagging time on the currency auction market uncontrollably extended from 1 month to 2 months as the Central Bank fails to meet increasing forex demand following the relaxation of lockdown measures which has seen most economic activities resuming. This leaves the economy susceptible to another economic trough as prices go haywire in a chase for value as traders start depending on the parallel market for liquidity. Resultantly, stocks started escalating in the last half of September and reached record highs within a week of recovery as investors seek out for safe haven amid the unexpected. The weak currency which poises constraints in fair valuation of assets has left other asset classes not viable to investors. Short-term investments, therefore, remain the only hope for tangible returns in the unpredictable environment.

The ZSE firmed by 29% in the recent month of September, which is the highest in 8 months. Undesired stocks like Zeco pocketed 300% gains in the respective month while market heavies collectively surged by 35%.

The Central Bank took a deliberate move to issue foreign currency to the general public through Bureau De Change in the month, and the increased flows of USD’s among the generality saw an improved flow of trades on the USD denominated bourse, VFEX. The bourse has averaged 3 days out of the total 5 in each week since early September. The Central Bank recently issued a statement with reporters that Zimbabwe’s annual inflation rate could end the year between 35% and 53%, up from an earlier estimate of 25% to 35%, as the local currency has dropped sharply on the black market. The revision has the reverse impact of stimulating hedge seeking going forward, which posits the bourse to sustain record breaking momentum in the remaining quarter of the year.

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