ZSE navigates turbulence, VFEX seeks traction

Zimbabwe’s capital markets in 2024 exhibited varied developments depending on the direction of obtaining macroeconomic events, market analysts have said.

During the first quarter, the stock market rallied as general local currency liquidity was high, coupled with exchange rate volatility. However, the introduction of a new currency brought about relative stability and moderated stock market activity to a flat to negative outturn.

Lloyd Mlotshwa, the head of research at broking firm IH Securities, told Business Weekly the headwinds remain broadly the same: currency dynamics, physical liquidity, and a difficult regulatory environment.

“It has been a difficult year for capital markets; turnover in real terms on the Zimbabwe Stock Exchange (ZSE) continues to fall significantly, at this point down 35 percent year on year and down about 77 percent since 2020.

“Whilst the Victoria Falls Stock Exchange (VFEX) is showing encouraging growth, it has not been enough to offset the overall decline in activity,” he said.

Mlotshwa noted that the macro environment will require broader solutions, but capital markets can combat the current shrinkage by expanding the markets and available products to effectively cast the net wider, and the establishment of the VFEX is a good first step.

“It is encouraging to see the proliferation of REITs and ETFs as hedge products; it would be good to see more debt products join the Karo Bond. Deeper innovation will also be critical to ensure that our markets remain relevant,” he said.

Finance, Economic Development, and Investment Promotion Minister Professor Mthuli Ncube recently said the Government will institute additional measures on the VFEX to prop up the bourse, which has largely been characterised by limited trading activity and liquidity.

For the ZSE, the minister proposed to reduce capital gains withholding tax on marketable securities to 1 percent effective January 1, 2025.

ZSE chief executive officer Justin Bgoni, in emailed responses, said the reduction will incentivise investors to trade, which will lead to increased liquidity in the market and will also attract more investors, ultimately boosting overall investment activity.

“A reduced capital gains withholding tax rate on marketable securities can make the investment landscape more appealing to foreign investors looking to invest in the market. “This can lead to increased foreign direct investment, which can benefit the economy as a whole,” he said.

Bgoni added that lowering the capital gains withholding tax can lead to improved market efficiency as investors may be more willing to engage in trading activities, leading to enhanced price discovery.

Kuda Mundowozi, a market analyst, said the year 2024 has been a period of significant change and adaptation for Zimbabwe’s capital markets.He said while challenges such as economic instability, low liquidity, and regulatory hurdles remain, the steps taken towards currency stabilisation and debt resolution are promising.

“To stimulate Zimbabwe’s capital markets in 2025, a strategic and comprehensive approach is essential.

“Key strategies include enhancing liquidity through the introduction of new financial instruments, streamlining regulatory processes, and implementing widespread investor education programmes,” he said.

He added that encouraging institutional investors with tax incentives and leveraging technology to improve market efficiency are also crucial steps.

Mundowozi noted that the year 2024 has also been a transformative period for Zimbabwe’s capital markets, marked by significant developments and challenges, and both the ZSE and VFEX experienced unique trajectories influenced by local and international events.

“Initially, the ZSE All Share Index achieved a nominal return of 334 percent in ZWL terms, translating to 15 percent in USD terms due to the ZWL’s depreciation.

“Post the introduction of the ZiG, the index realised a nominal return of 28,64 percent, equivalent to a 27,38 percent return in USD terms,” he said.

Munowozi said the the VFEX’s ability to raise capital in hard currency and lower trading fees provided some relief and potential for growth.

Investment analyst Enock Rukarwa said the introduction of ZiG, which brought about relative stability, moderated stock market activity.

“What has been topical around stock market developments is the issue to do with foreign currency settlement, wherein ZSE trades were being settled with statutory charges only and settlement happening offline in USD.

“This phenomenon ignited improved liquidity on the market, but it was discontinued by regulatory authorities,” he said.

Rukarwa added that stock market liquidity, depth, and size are key areas of concern locally, and all these variables are a function of economic developments, and an improvement in general macroeconomic conditions should transfer positivity onto the stock market.

Financial analyst Malone Gwadu said the ZSE and VFEX went through relatively usual stages of runs and stability, which largely mimic the inflation and exchange rate dynamics characterising the economy.

He said ZSE mainly acts as a safe haven for investors in times of volatility, as was the case during the first quarter (Q1) of 2024 and later in 2024.

“The rush to hedge against exchange rate loss through buying shares also played a large role in leading to share price movements. The VFEX remains hampered in performing well due to liquidity issues,” he said.

Gwadu said there is a need to stabilise inflation and exchange rate volatility if the economy is to be able to attract more activity in the capital markets.

“These remain systemic and structural threats to gains and value for investors and impede building confidence in the bourses’ trading activities,” he said.

According to Mundowozi, offering tax incentives to companies that list on the ZSE can encourage more businesses to go public, increasing market diversity and investment opportunities.

“Rwanda has implemented tax incentives to attract junior mining companies, which focus on exploration and then sell their assets after making discoveries. Similarly, Ireland offers a low corporate tax rate of 12,5 percent to attract multinational companies,” he said.

Mundowozi said encouraging companies already listed on other exchanges to list on the ZSE can attract foreign investment and enhance market liquidity.

He said the Johannesburg Stock Exchange (JSE) in South Africa has successfully implemented a fast-track listing process for companies already listed on major stock exchanges, allowing them to place a secondary listing on the JSE’s Main Board.

“This approach has diversified the investor base and improved brand recognition for companies,” he said.ebisnessweekl