Taking Stock Kudzanai Sharara
Foreign exchange changes made by the Reserve Bank of Zimbabwe governor Dr John Mangudya, have triggered a stock market sell-off that has now reached double digits’ losses post the Monetary Policy Statement, reversing the little gains that were still there before the announcement.
By Tuesday this week, the main Industrials Index had lost 11 percent, but more pronounced losses were recorded in the ZSE Top 10 index which houses the market’s top counters by market capitalisation.
Big caps in blood bath
While at least 25 counters have tumbled, losses have been more pronounced in heavyweight stocks, which is not a surprise as they are the ones that had caught the eye of foreign investors.
Delta, one of the most liquid and most traded counters on the ZSE, has lost 12,69 percent to 291,12 cents since the MPS was announced.
Similar losses have also been recorded in Econet down 15,24 percent to 123,74 cents, Cassava down 12,4 percent and Innscor 19,44 percent.
These counters, among others on the ZSE Top 10 Index, count foreigners among their shareholders and have suffered the wrath of the selloff.
No love lost with foreign investors
Foreign investors, long stuck in local markets, unable to recoup their gains, dividends or even their initial investments are behind the current sell-off. Market players believe the 2019 MPS, released on the 20th of February presented some foreign investors with an avenue to finally enjoy their money while to some it was a signal that what they were in the local markets for, is long gone.
In his MPs and the subsequent guidelines on how foreign currency should be utilised, Dr Mangudya said 15 percent of all foreign currency payments must go towards “disinvestment proceeds from portfolio investments”.
Proceeds from the sale of shares done before 20 February 2019, can now be processed through the interbank market. Those who seek to repatriate the full value of their investments will also be allowed to expunge their debts on a First-in-First-Out basis through the interbank market, of course after meeting the terms and conditions set.
“Authorised dealers are also advised that new portfolio investment inflows received after 20 February 2019, should be liquidated at the prevailing market exchange rate to enable the purchase of shares on the ZSE in RTGS dollars.
“Thereafter, proceeds from sale of such shares will be sourced from the interbank at prevailing rate,” reads the RBZ statement outlining foreign currency utilisation guidelines.
This, analysts say, has triggered a sell-off by foreign investors who had been restricted to the use of Old Mutual shares to take their money out of Zimbabwe.
There is hope that the new measures that govern the utilisation of foreign currency will allow foreign investors to repatriate funds outside Zimbabwe, so there is that sell-off, to go and try get US dollars from the interbank forex market.
Sean Bvurere, an analyst with a local asset management firm said the decline is to be expected as the market is coming off an extremely volatile 2018 “where we saw sharp moves which were driven by macroeconomic factors, valuations were loosely linked to fundamental performance of the stocks”.
“Since the changes put forward in the recently published MPS there has been a downward reaction, I think the biggest contributor to this is the impact the MPS had on foreign investors. With 15 percent of all forex sold on the FX market going to portfolio disinvestments for international investors and essentially cutting off the ability of disinvestment through fungibility on Old Mutual, foreign investors now have an avenue to get money out at a more favourable rate than the OMIR,” said Bvurere.
The second reason why foreign investors might choose to sell-off their shares in Zimbabwe is that one of the major attraction to invest on the ZSE, that of limited foreign exchange losses has now been removed.
At the start of dollarisation, risk averse investors would know the only risk was share price movements, as the country was using US dollars, which could be withdrawn and deposited at any time. But the US dollars and the parity with bond notes, is now gone, and investors are now faced with exchange rate risk.
As the RBZ said “proceeds from sale of such shares will be sourced from the interbank at prevailing rate”. Even those who invested when the US dollar was the main currency in use, will now have to buy back those US dollars at the prevailing rate, and risk exchange losses.
Ranga Makwata, a market analyst with Zfn believes investors are leaving in despondency after what they thought to be USD values are now being officially designated as RTGS$ with a steep exchange rate far from 1:1
“Now that 1:1 rate no longer applies and the official rate at 2.5 against the USD investors are not sure what the actual level to be but they seem to concur that it’s overpriced. Many are leaving in despondency after what they thought to be USD values being officially designated as RTGS$ with a steep exchange rate far from 1:1,” he said.
Old Mutual factor
Among the counters that have recorded significant losses is dually listed Old Mutual. For several years now, the counter was one of the most sought after by foreign investors and other local investors, mainly as an avenue to repatriate funds outside Zimbabwe. Even at a huge premium, investors were willing to take the losses, so long money is out of Zimbabwe. An investor would buy the Old Mutual share on the ZSE and sell on the JSE allowing them to take money out of Zimbabwe. But following the new foreign exchange utilisation guidelines, some investors are taking a chance hoping to buy money from the formal market. At the current rate of US$1: RTGS$2.5 an investor would prefer the interbank market than the Old Mutual route where the premium is much higher.
Post the MPS, Old Mutual is the second biggest loser after Hippo Valley. The Insurance giant has lost 22,7 percent since the MPS was announced coming second to Hippo Valley’s 31,42 percent tumble.
The market was overbought anyway
At an analysts’ briefing in November 2018, Delta’s financial director, Matts Valela, was asked why the company had continued to pay dividends instead of share buybacks. In response he said they believed their counter was overvalued, and it seems there is consensus among analysts that indeed the market was overbought and the currency changes have removed most of the reasons why investors were flocking to the ZSE.
According to Makwata, “the market was looking overbought for some time but it continued to get support from investors seeking value preservation in the wake of rising inflation and weakening foreign exchange rate on the parallel market.”
“I’m not sure if the market still provides value preservation opportunities given its current demanding valuations. Also to consider is “the massive fall in real earnings capacity as business feel the full impact of shrinking real disposable income manifesting itself as falling aggregate demand,” noted Makwata.
It’s a buyers’ market
The foreign exchange market changes have also turned the ZSE into a buyers’ market. Not many investors are too keen to buy into shares at the moment and as a result supply is exceeding demand, giving purchasers an advantage over sellers in price negotiations. Another market analyst, Respect Gwenzi, believes while foreign investors are keen to sell, demand is heavily subdued.
“My own assessment is that most of the local investors who drove demand ahead of the MPS piling into equities in anticipation of a currency change, have found themselves stuck with shares while they have need for liquidity following the maintenance of currency settings though with partial liberalisation. Consequently, the market seems dominated by sellers as investors seek liquidity,” he said and it’s a sentiment shared by many, there is very little interest in buying.
Bvurere also reckons some of the selling, could be a result of speculation ahead of an interest rate hike to curb inflation which reached 56 percent in January 2019.
“Additionally we may also be seeing speculative expectation from the market that interest rates will be adjusted upwards with possible introduction of inflation linked fixed income instruments.
This, he says, has likely seen investors speculatively seeing value in holding RTGS values.