Liquidity constraints weigh down on equities market

Performance of the equities market is expected to continue to be impacted by obtaining liquidity conditions coupled with value preservation concerns during the fourth quarter of 2023, according to analysts.

In the Mid Term Monetary Policy Statement presented in August, the Reserve Bank of Zimbabwe (RBZ) reiterated its commitment to the tight monetary policy in an effort to tame inflationary pressures.

Already the greater part of the year has been challenging for the equities markets. During the nine months to September 30, 2023, activity remained depressed due to tight liquidity and confidence issues that continue to affect investor sentiments.

While the Zimbabwe Stock Exchange (ZSE) has seen gains with ZSE All Share index advanced 550 percent year to date, in real terms the market still remains below the US$4 billion total market capitalisation during dollarisation period.

As such, investors are likely to shift focus to other options to hedge against currency volatility and inflationary pressures.

“The stock market’s performance is likely to continue to be impacted by local liquidity conditions and value preservation concerns given existing currency dynamics,” said FBC Securities in an update last week.

“We expect appetite for alternative investments to continue to grow as investors continually assess local economic conditions.”

However, despite a widespread dollarisation trend, activity on the US dollar denominated exchange – the Victoria Falls Stock Exchange (VFEX) remains largely subdued as a result of continuing confidence issues, growing preference for alternative investment options among local investors and low participation from foreigners, according to FBC Securities.

In September, the benchmark All Share Index on the US dollar exchange advanced by 4 percent to close the month at 74,48 points. But on a year to date basis, the VFEX lost 25 percent.

This comes as the economic environment remained challenging. Although Government managed to tame currency volatility and achieved some degree of exchange rate stability with official inflation figures continuing to trend downwards, confidence in the local currency remains low due to past experiences of volatility and value loss.

“Promoting wider use of the local currency has been challenging as economic agents continue to favour the US dollar for transacting and value preservation.

“Stability of the local currency remains fragile, hinged primarily on Government’s ability to continue to control money supply, foster confidence and encourage use of the local currency.

“A mix of measures to increase the supply of foreign currency, while simultaneously reducing demand for the USD and increasing demand for local currency should also alleviate pressure on the local currency,” said FBC Securities.

The research firm has also maintained managing currency and restoring confidence in the local Zimbabwe dollar will remain a priority for monetary authorities as over 80 percent of local transactions are now in US dollars.

“Promoting wider use of the local currency has been challenging as economic agents continue to favor the US dollar for transacting and value preservation,” said FBC Securities.-ebusinessweekly