ZSE: Coming of the dry season, shift to quality

Appetite for Zimbabwe Stock Exchange-listed stocks has been significantly subdued in the last ten trading days with daily turnover averaging just above $90 million.

In the previous ten trading days the ZSE had an average $206 million in daily turnover.

And prior to that, average daily turnover was even higher at $226 million.

Interestingly, the slump in turnover comes after the market recorded a very strong August with turnover at $3,4 billion, the fourth-best so far this year.

Overall turnover for the year has already hit $27,4 billion, 58 percent more than the turnover invested on the ZSE for the whole of last year. This showed a strong appetite for stocks.

However, trading activity in the last ten days has been significantly subdued.

Amusingly, the slowdown comes when money supply in the economy seems to be on an upward trajectory with Reserve Money hitting $27,3 billion for the week to 20 August then up again to $27,7 billion for the week to 27 August 2021.

In the past, there has been a correlation between increased money supply levels and a rally on the stock market. Not this time though. And it’s not easy to tell why.

One closer explanation though is that the reduced investment onto the stock market coincide with the issuance of a $1,5 billion bond by Government.

The two-year bond is opened on a Tap Basis, and closes after every fortnight.

The bond’s features include prescribed asset and liquid asset status. It is also tradable, redeemed/payable at RBZ on maturity and acceptable as collateral.

Its prescribed asset status also means most pension and provident funds would invest in it to meet regulatory requirements. Most pension funds currently do not meet regulatory requirements.

The bond also has a coupon rate of 18 percent per annum payable semi-annually which makes it very attractive if inflation continues to slow.

This means there are competing needs for funds.

The target market for the bond are pension and provident funds, insurance companies, mutual funds, and commercial banks, the biggest players on the ZSE as well.

The second explanation is that there has been an apparent shift towards alternative investments. The Public Service Commission, one of the biggest buyers of equities on the ZSE this year, is reportedly shifting its focus toward alternative investments.

Old Mutual Zimbabwe, one of the biggest equities buyer, also highlighted the shift pointing out that the Group made significant deployments in the alternative investments space.

An equivalent of US$18,4 million (an equivalent of $1,58 billion at the auction rate of 86) was deployed into private equity and infrastructure related projects in H1 2021, according to CEO Sam Matsekete.

Among other projects, Old Mutual Zimbabwe has invested in is a 5.4 MW solar farm at Cross Mabale in Dete, Matabeleland North province.

Another solar project Old Mutual Zimbabwe is invested in is Harava Solar, which is building a 20 MW solar farm in Seke just outside of Harare. Old Mutual Zimbabwe has also funded the installation of solar-powered irrigation equipment to assist water reticulationand small-scale agriculture at 26 schools.

Another school of thought is that inflationary fears are dissipating. From a peak of 837 percent in July 2020, to 50,24 percent in August 2021, it means those who were coming to the stock market for hedging purposes are now looking elsewhere for alpha returns.

With reduced funds going into the market, the ZSE has been on a downward pressure. In August the ZSE’s market capitalisation closed 1,44 percent lower than July, mostly because of the last 10 trading days.

This was the first month the market closed negative this year.

Since the beginning of September, the market has however recovered a bit, and at a market capitalisation of $799 billion is slightly higher than the August close of $792 billion.

What is apparent, however, is that stock prices might no longer be driven by increased money supply, but by performance of listed stocks. We are currently in the earnings season, and investors are likely to reward companies that do well.-ebsuinessweekly.cl.zw