VFSE not an automatic solution for shareholders

There is a tendency in some business quarters for people to believe that moving into what would amount to dollarisation is a cure for most of their troubles, yet the evidence is now suggesting that this may not be the case.

The Victoria Falls Stock Exchange, where trading is in US dollars, is a case in point. Of the 11 counters one, Westprop, has not been around long enough on the exchange to record the results of exchange trading. Of the other 10, six have lost value since the beginning of the year, with Bindura leading the downward trend on minus 44,8 percent, Axia on minus 35,1 percent and Innscor on minus 34,4 percent.

Caledonia has seen the major jump in value, of 23,1 percent. This share was first floated on the VFSE, rather than being transferred from the Zimbabwe Stock Exchange, and tends to be very tightly held with sometimes zero trading in a particular week. It is not really a typical share on that exchange as a result.

But the other direct float before the end of last week, Nedbank ZDR, has seen a value drop of 5,7 percent, so we cannot see a trend there, except perhaps Caledonia was undervalued on floatation and Nedbank slightly overvalued, and even that is dubious considering the low trading volumes.

Simbisa has risen in value by 9,4 percent, the second best after Caledonia, then National Foods on 1,3 percent and Seed Co International, one of the earliest listings on the VFSE, on 0,2 percent.

The losers start with African Sun on minus 1,9 percent so far this year, then Nedbank ZDR on minus 5,7 percent, then Padenga on minus 12,5 percent, before we reach Innscor, Axia and Bindura.

On the other hand most shares on the Zimbabwe Stock Exchange have easily beaten inflation this year, and even when you convert Zimbabwe dollar prices into US dollar prices at the prevailing black market exchange rates on January 1 and today, well over half have beaten inflation on that measure as well.

As a rough guide if the price has more than doubled over the year to date you are probably ahead, however you do the sums, and most ZSE prices have more than doubled and some have even tripled.

We need to remember that measures last year stopped a lot of wilder speculation on the ZSE and that these are still in force. Generally the ZSE has easily outperformed the VFSE.

When you consider what happened soon after dollarisation in 2009, some fall in value on the VFSE could have been expected for those shares that were transferred from the ZSE. This was largely due then to the overpricing caused by those either trying to make money out of hyperinflation, or trying to preserve value of their liquid capital and savings by buying shares, directly or through unit trusts.

With those groups largely leaving the market, and the serious shortage of US dollar liquidity in the earlier years of dollarisation, a drop could have been predicted at the start of the switch of US dollar trading.

But very soon the dollarised ZSE stabilised, and in fact the industrial index for some time became one of the most boring economic measures, a graph showing a horizontal line for month after month with only the tiniest fluctuations and the ups and downs cancelling out.

Another perhaps useful analysis of the VFSE could look at the four counters that derive from the old Innscor empire before it was split. Two of the counters, Axia and the new Innscor have lost more than a third of their value. One, and the earliest of the four to move, Padenga has seen a modest drop of 12,5 percent, and one, the second largest of the four companies, Simbisa, has actually risen almost 10 percent.

In addition we have Natfoods, which has Innscor as its biggest shareholder although with less than 30 percent, although Natfoods management is involved in Innscor decision making. That counter has in fact risen marginally by 1,3 percent.

These four companies arising from the split a few years ago still share a lot of shareholders, although differential trading since the split has seen some change, and perhaps should have been more aligned in their pricing changes, not dramatically aligned but not anything like the 45 percent difference in value change.

Some of the large jumps in value in the VFSE counters can be explained by the low level of trading. This arises from the fact that there are not that many people in Zimbabwe with large sums in US dollars willing to invest in a stock market with those US dollars. The vast bulk of liquid US dollar holdings are kept in those nostro accounts maintained by net exporters, and they have proved remarkably reluctant to put their money to better use than just keeping it sitting in what amounts to an electronic steel trunk.

Outside those electronic trunks, and the smaller trunks of banknotes that seem to be kept by people who do not mind being targets of robbers, most of the US dollars around are in circulation and are spent almost as fast as they are earned; they are very liquid. There is little spare for savings or investment, and that means there is little going into the VFSE. At the same time there will be shareholders wanting some liquid cash, and so willing to sell shares when they are caught short, so supply probably could exceed demand, and that shows.

But the very limited trading means that the few sales of small parcels of shares, and in the case of Caledonia even a single trade of a modest parcel, could cause a major fluctuation of price. Weekly price jumps of more than 5 percent are not unusual, although in a US dollar denominated share should not be happening. The small trading volumes would make the difference, rather than fundamentals such as earnings or expected earnings.

It is almost certainly the case that almost all share trading on the VFSE is done by Zimbabwe residents, with most of the counters almost entirely held by local residents. These are the counters where the share was moved from the ZSE to the VFSE.

The holders of the shares converted their local dollar investments into US dollar investments, which attracted them and obtained their agreement. But the falls in value and the difficulty of finding liquid buyers has limited the benefits. We hope most shareholders are in their counters for dividend income in foreign currency, which would make sense if they were a pension fund or someone wanting to fund their own retirement.

There are severe limits to how much capital a Zimbabwean resident can transfer to a foreign country each year, so even selling a large block of shares simply means that a Zimbabwean resident has a large block of US dollars in their bank account. The fact that buyers and sellers have to use electronic transfers, rather than coming out with a briefcase full of US$100 notes, means that the authorities can see the money in the accounts, and those accounts come under the control of the authorities.

Of course those wanting to churn their portfolios on the exchange can do so, but with only 11 shares that might not be that easy, especially where people want to hold their shares, and in any case there are the stockbroker fees and taxes. But the 5 percent weekly shifts might make some willing to gamble, except no one can predict which way the 5 percent will go in any one week. Perhaps the gambler needs to toss a gold coin.

But the whole point of the what has been happening on the VFSE shows that dollarisation is not necessarily the sort of ideal solution that some have touted it as. Some shareholders of some migrants from the ZSE have lost a lot of value in the short term, and have only gained the dollarisation of the remaining value of their investments in return, along with a less liquid investment.

Fairly obviously a migration to the VFSE is not a solution that fits all shareholders and all companies, and needs to be more comprehensively considered by all shareholders, not just the largest, before they can agree to recommendations by the boards of directors. That is besides the other listing requirements and the costs of meeting those requirements.-ebusinessweekly