Speculation drive ZSE swings

THE upswing and downswing of the Zimbabwe Stock Exchange (ZSE) last year was due to speculative tendencies, with analysts attributing the latter to market correction.


In his 2018 Monetary Policy statement last week, Reserve Bank of Zimbabwe governor John Mangudya said developments on ZSE last year pointed to more speculative tendencies.

“Speculative tendencies largely drove the resurgence of the stock market in 2017. Reflecting this, the total market capitalisation rose to well over $15,2 billion in November 2017, before retreating to $9,6 billion by year end. The stock market, however, experienced net capital outflow of $101 million from foreigners.”

When the military stepped in on November 15 to arrest the deteriorating social and economic conditions, the ZSE responded with a slowdown of activity on the day of the announcement.

ZSE plunged into a sell-off mode in the days that followed, as investors were spooked and sought to take out their money fast fearing the new political dispensation, resulting in the net capital outflow after pouring billions into the bourse.

At the time, most analysts agreed what was making the ZSE market go up to the $15 billion was the fact that investors wanted to convert their real time gross settlement (RTGS) balances, which were just sitting in bank accounts to an actual investment.

The year 2017 saw average monthly RTGS balances of close to $2,4 billion and also recording a whopping $91 billion in RTGS transactions. Further, in terms of money supply, transferable or transitory deposits by year-end were $6,18 billion.

To that effect, investors were driving the bull-run through investing RTGS balances, so too the bear run as they were rushing to take out their investments amid uncertainty over the military intervention.

ZSE acting chief executive officer, Martin Matanda said the upswing to November 14 was a result of inflation fears.

“To understand the progressive decline, it is important to understand why it had risen sharply from $5,78 billion in July 2017 to the peak of $15,19 billion in November 2017,” he said.

“The initial upswing to 14 November 2017 was on account of strong inflation fears sparked by the growth in money supply and the lack of parity between the greenback and the bond notes. The 2017 mid-term monetary policy announced in August 2017 indicated that annual broad money supply amounted to $6 200,3 million in May 2017, representing an annual growth rate of 23,24% from the $5 031,3 million recorded in May 2016.

“The growth was on the back of an increase of 29,85% in transferable deposits, which was partially offset by declines of 14,28% in negotiable certificates of deposits and 0,07% in time deposits. Consequently the stock market became a safe haven for inflation hedging and as such investors’ switched portfolios from money market denominated assets to stocks.”

ZSE research found that the market could be influenced by a major political event, different from economic influences, that usually cause a correction such as the current one happening in the United States.

On February 8, 2018 the Dow Jones Industrial Average and the S&P 500 fell more than 10% from their recent highs in late January sending global markets into panic.

The highs were as a result of corporate optimism in the United States based on the country’s Senate passing a sweeping overhaul of the country’s tax code last December. This was due to the fact that the tax code passed would give major breaks for corporations and only giving temporary ones for individuals in the years to come.

But, as market-forces and fundamentals prevailed later on, the gains in the market later slowed, leading to this current sell off and market correction.

Comparatively, the ZSE’s market cap was at $8,5 billion as of the end of Monday’s trading and has not returned to the $6 billion it was before the bull run.

Analysts say the downswing was due to market correction, because some of the bigger counters were being overvalued leading to the stock market cap, being higher than gross domestic product (GDP) when really investors just have a bigger trust in these counters compared to others.

However, according to the World Federation of Exchanges, a country’s stock market capitalisation can be more of the GDP; a case in point being the Johannesburg Stock Exchange which is about 280% more than South Africa’s GDP, according to ZSE.

But, investors still blame what happened on the main bourse as market correction.

“What I actually think is that the market is re-correcting itself. If you noticed last year, it went on a rampage of sorts and the reason was simple, there was inflationary expectations. People expected the parallel market prices to keep going up, they expected prices to be moving up in the shops, they expected the devaluation of the local unit so rates of the USD was moving from 30% to 70%,” local investor Taurai Chinyamakobvu said.

“So if you were say a pension fund holding a lot of money you would have to find a place where it doesn’t deflate, where it retains the same amount of value so a lot of money was flowing into the stock market. There is a lot of money in RTGS and there is a lot of money that came about from self-correction, so the money has not gone away but what has started creeping in is a strong sentiment of stability.”

Investment analyst, Ranga Makwata echoed similar statements.

“Indeed it was a market correction. Prior to that and for months the market had rallied driven mainly by value preservation motives. The bank balances were increasingly losing value against the real US dollars and those who found themselves with large bank balances were deploying them in avenue that could retain some value in particular foreign currency and listed shares,” he said.

“The high demand obviously pushed the share prices and foreign exchange rates higher. The new political dispensation ushered in some renewed confidence in the market, the exchange rates on the parallel market actually pulled back from 1,90 local balances against the dollar to 1,5. At that point it made sense for the stock market to also pull back as panic buying slowed down”.

With liquidity still remaining a challenge and RTGS balances soaring each day on the back of the increase of Treasury Bills in the market, most stock brokers are expecting the market to grow further than what it is.

This means investors will once again have a lot of unused balances, leaving them with no choice but to invest that money.

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