THE introduction of gold coins has triggered a sell-off on the Zimbabwe Stock Exchange (ZSE) as recently announced government measures stifle activity on the local bourse, making it one of the most undervalued stock exchanges in the region, a new report has shown.
A sell-off occurs when a large volume of securities are sold in a short period of time, causing the price of a security to fall in rapid succession. As more shares are offered than buyers are willing to accept, the decline in price may accelerate as market psychology turns pessimistic.
Authorities have in recent months announced a cocktail of measures to slow down rising inflation and defend the value of the Zimbabwe dollar. Experts say a deteriorating local currency and tight liquidity have seen the ZSE market capitalisation falling in real terms from US$6.7 billion in January 2022 to US$2.6 billion (using parallel market rates.)
Last month the Reserve Bank of Zimbabwe introduced gold coins into the market in an effort to ease demand on the Zimdollar as well as preserve the value of the local unit. A report by a local brokerage firm shows that while the gold coins have presented a new asset class for institutional investors such as asset management firms and pension funds, activity on the ZSE has been depressed since their introduction.
“The gold coin has triggered a sell-off on the Zimbabwe Stock Exchange as institutional investors are switching to an alternative asset class that has prescribed asset status. As a result, the stock market has de-rated pon weak demand because of tight liquidity in the market, “Morgan & Co said in its Economics and Equities Strategy note.
“One fundamental observation is that stock prices have declined significantly in real terms and the market is looking for ‘cheap”. The recent sell-off on the ZSE has resulted in the apparent undervaluation of traditional blue chips like Delta, Econet, Innscor, Hippo and Meikles while there have been no fundamental changes to business models. Additionally the financial services sector remains undervalued.
“As part of our assessment, we compared the ZSE with other regional stock exchanges using market cap as a percentage of gross domestic product (GDP). Our findings are that the ZSE market cap expressed as a percentage of GDP is amongst the lowest at 11.9% vesrus a regional average of 16.3%. This analysis confirms our view that ZSE stocks are undervalued and there is scoping for re-rating.”
The government has over the past 24 months introduced several measures such as the suspension of trading of dual listed entities and the review of capital gains tax for shares held for a period not exceeding 270 days in a bid to control inflationary pressures, instil confidence, strengthen demand for the Zimbabwe dollar and foster market discipline.
The measures, according to market watchers, have had a negative impact on trading volumes on the local market given limited access to Zimdollars and increase in trading costs.
“All in all, the instability has largely triggered low levels of investor confidence which has been a major impediment in terms of foreign direct investment flows into the country,” the report reads.
“Also, currency risks have also limited inflows. This is because investors cannot freely move money in and out of Zimbabwe. This remains a barrier to the flow of new money into the Zimbabwe. As a result, the country has not been able to secure adequate lines of credit to capacitate local producers.
“Morgan & Co contends that Zimbabwe needs to do all the things necessary to attract foreign and regional partners to not just grow but survive in the new global economy. International investors today possess a plethora of investment options in the form of asset classes and projects they can invest in.”