A market that loves corporate transactions!

Zimbabwe Stock Exchange (ZSE)

THERE is no doubt that the biggest determinant of activity on our local bourse, the Zimbabwe Stock Exchange (ZSE), is liquidity.

Put in other words, each time there is an unusual injection of local Zimbabwean dollars into the economy, you are likely to observe a bull run on the exchange.

Hawkish stance from monetary authorities usually sees the exchange coming off.

However, in an efficient market, you should expect more variables, such as the macroeconomic or sectorial outlook to have an impact on the activity on the bourse but more importantly the individual company’s performance to be the X-factor.

An efficient market is one that reacts quickly to information pertaining to factors that have a bearing on an underlying security.

Efficiency in markets can be then further broken down into the most efficient, also called strong from efficient, with semi-strong as the average and weak form being the most inefficient market.

Based on my experience and observations, I opine that the ZSE is closer to the weak form efficiency than anything expected for a few cases when it reacts to positive information that comes from the blue-chip counters.

With all that said, I have also observed that the ZSE reacts consistently to news regarding corporate transactions. Besides liquidity, I opine that corporate transaction announcements are another determinant of activity on the bourse, although they do not come that often.

A corporate transaction involves, amongst other things, two companies merging, one acquiring a stake in another company or a firm spinning off its assets into another standalone company.

When a listed company is considering engaging in such a corporate transaction, it publishes a cautionary statement alerting stakeholders of the transaction’s potential impact.

In most cases, stakeholders are advised to consult their financial advisors about what action to take amid the cautionary period.

Roughly a year after first indicating its indication to exit the Zimbabwean market, Standard Chartered Bank Zimbabwe finally announced together with its acquirer FBC Holdings that the two will be engaging in a corporate transaction subject to approvals by the regulator.

The acquisition became public knowledge on June 8 and ever since the acquirer’s share price has gone up by over 300%.

As to whether the acquisition justifies the share price appreciation, becomes another discussion altogether but one thing for sure is that the market somehow responded to the news of the acquisition.

CBZ Holdings, the biggest bank in the land, is also trading under caution, as it expects to consolidate its acquisitions in First Mutual and ZB Bank.

The deal has taken almost two years now due to its size, but each time it seems like progress has been made it is reflected in the share price of the involved entities.

Also, earlier in the year, Econet Wireless Zimbabwe and Ecocash Holdings announced their intention to raise to the tune of US$30,3 million each via rights issue exercise to redeem their debt obligations. The companies borrowed the funds before their separation and hence had to share the debt obligations equally.

A rights issue is another form of a corporate action whereby a company reaches out to its current shareholders to ask them to inject more capital into the business.

This process is known as subscribing their rights and in the event that current shareholders are unwilling or unable, their rights can then be offered to other potential shareholders and it has the risk of dividing the cake.

These rights issue exercises also had a significant impact on the market activity, with the share price of both companies initially taking a dive before they recovered as more information became available to the market.

Truworths and Turnall are also carrying out some rights issue exercises to raise money for capital expenditure.

However, the full effect of the exercise on share price is not yet apparent but it is possible that the market can choose to completely ignore it considering how small the companies are relative to the overall market.

Another corporate action that has spurred activity on the bourse, especially in the past year is the migration to the Victoria Falls Stock Exchange (VFEX).

A trend has been noted that when a company announces that it will be crossing over to the VFEX, its share price usually increases and so does the activity.

A possible explanation is that the VFEX trades in foreign currency whilst the ZSE is Zimdollar-denominated, hence buying a migrating company is tantamount to buying foreign currency.

However, over time experience and reality have taught some investors that given the illiquid nature of the VFEX, the exercise might not be as attractive as it looks on paper.

Interesting enough, over the period, some companies, like Econet, posted a loss after tax and the market completely eschewed it only to be moved by liquidity and corporate actions.

Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.

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