The investment arena in Zimbabwe has lately seen a significant shift from the profiteering model to value preservation model as prospective investors seek safe havens amid a value-loss crisis.
This has seen a transition from traditional investments to more dominance in alternative investments. Alternative investments or assets include real estate, infrastructure and private equity while traditional assets include stocks and bonds. The Insurance and Pensions Commission in Zimbabwe recently reported that pension funds had 44% of their investments in properties in the fourth quarter of 2022, up from 30% in the corresponding period in 2021 and this is, however, above the threshold of 40%.
The given threshold is meant to reduce exposure in one asset class which may increase the susceptibility of the portfolio to concentration risk. Since pension funds involve investing public funds pooled together, regulations need to be put in place to protect the public from losses, and that has necessitated the threshold meant at curbing concentration risk.
However, it appears the companies are running out of diversification options in the country in their bid to preserve value, and high exposure in long-term assets may be their best bet.
Alternative investments are usually less liquid, less volatile and less or non-regulated while traditional investments are highly liquid, highly volatile and highly regulated. The advantage of highly liquid and highly volatile investments (traditional) is the high magnitude of return offered, which is associated with the high risk.
However, the risk can go as high as unrealistic levels which renders companies with high liquidity needs or more to lose to opt for alternative investments, which has been the case for banks and insurance companies in Zimbabwe.
To begin with, Zimbabwe is a highly volatile economy due to the highly fragile currency which has been depreciating against the US$ on a daily basis for over a year now on the formal currency market. This has also driven up inflation levels to world record high, which has prompted the Central Bank to adopt a new inflation statistic called blended inflation in a bid to dilute the rampant inflation figures and manage speculation.
However, the exchange rate has continued to depreciate and thus ZWL denominated asset classes have recorded significant value losses. In 2022, the ZSE lost close to -85% of its value in real terms, despite a nominal 80% growth. This came as a combination of two factors highlighted above which are volatility and regulation. Currency volatility led to a real value loss in real terms, despite a nominal growth, while regulations dragged down recovery potential in the year. The government implemented measures meant at curtailing inflation, which directly and indirectly affected the traditional investments (stock market in this case). These included the pinning down of money supply which constrained demand, and the increase of capital gains on the ZSE, among other measures. Properties which are reported in ZWL have also suffered from undervaluation, which has negatively impacted the market value of investors’ portfolios.
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While the volatility has worked to the disadvantage of investors in recent months, asset managers have opted to increase exposure in immovables and less regulated markets. While IPEC reports a growth in real estate exposure from pension funds, the stock market has been recording a slow-down in turnover despite a revamp in prices.
This is reflective of less participation from institutional investors on ZSE. Despite a negative price trajectory on VFEX owing to low liquidity, the turnover on the market has been on a rise in recent months, which is reflective of increased participation from institutional investors on the US$ denominated market.
One could argue that the ZWL has grown unpopular from the investing public, and this can weigh on all ZWL-based investment vehicles in the medium to long-term.