Foreign portfolio investors on the Zimbabwe Stock Exchange can be forgiven for their love-hate relationship with the local bourse.
It has not been an easy road as the local economy gave very good returns at some point, and also became a value trap for many an investor.
The roller coaster rides of the hyperinflation era, prior to 2008, wiped out any gains made by any investor who dared dispose of their shares. This is one such episode foreign portfolio investors would want to quickly forget.
But following the adoption of the multicurrency system, which eliminated foreign currency risk, foreign portfolio investors returned in their droves again.
Zimbabwe was offering them returns not matched anywhere. Emerging from the hyperinflation era, most listed companies were undervalued and became a bargain for portfolio investors.
At US$1,37 billion market capitalisation at the end of January 2009, the ZSE was an opportunity for exciting returns. It closed that year valued at US$3,8 billion, a 179 percent return. Add to that the absence of exchange rate risk, and not any other frontier market could match the ZSE’s attractiveness.
As the economy recovered, stock valuations were also getting a boost.
By end of July 2013 the ZSE market capitalisation reached its peak of US$6 billion.
All the while, from 2009 to 2014 foreign portfolio investors were net buyers on the ZSE.
The ability to repatriate funds made the ZSE very liquid, with foreign portfolio investors buying and selling and taking their profits with easy.
However, come 2015, the country started facing foreign currency challenges. Portfolio investors struggled to repatriate their dividends and disinvestment.
They panicked and from 2015 to 2017 they became net sellers. The situation worsened. They were trapped, despite such transactions being on the first category of the priority list for the allocation of foreign exchange.
In August 2017, the RBZ introduced a portfolio fund in an attempt to speed up the repatriation of portfolio-related funds to foreign investors invested on the ZSE. The central bank placed an initial seed capital of US$5 million into the Fund to kick-start the repatriation mechanism. But this didn’t help.
Some market players then discovered they could buy dual listed Old Mutual on the ZSE and on sell on the JSE or LSE. This saw foreign investors becoming net buyers again in 2018 and 2019.
On paper it looked like foreign portfolio investors had returned to the bourse, but far from it. The funds long trapped in banks returned to the bourse to buy Old Mutual.
No new money was coming. It was a desperate way to repatriate funds even at a loss as the price of Old Mutual on the ZSE was at a more than 100 percent premium to prevailing prices on the JSE and LSE.
Portfolio investors didn’t care less. At least they were getting something. It was a stop loss to them.
The introduction of the foreign currency auction system since June 2020 has however provided a less costly platform to repatriate funds. Foreign investors can simply sell their shares on the ZSE and bid for forex on the foreign currency auction trading system.
They have not been shy to do that either. Statistics from the ZSE show that since the beginning of 2020 to now, foreign investors have been net sellers on the ZSE.
Between January 2020 and Tuesday this week foreign investors had sold shares worth $6,6 billion and only bought shares worth $1,5 billion.
But following economic reforms, that the country has embarked on since October 2018, it seems like the vibe is correct again.
Despite initial setbacks, that saw massive depreciation of the exchange rate, and a close to four digits’ annual inflation rate, stability is slowly being achieved.
The exchange rate, both on the official and parallel market, has been stable for months.
Annual inflation for April 2021 was 194 percent, the lowest in more than 2 years and below the peak of 837 percent recorded in July 2020.
However, the big question is whether this is good enough to lure back portfolio investors.
Finance and Economic Development Minister Mthuli Ncube took time to pick their thoughts on the investment climate in Zimbabwe.
On a roadshow trip to South Africa, on which he was accompanied by ZSE chief executive officer Justin Bgoni, Minister Ncube had engagements with stockbrokers and fund managers that were or are still invested in Zimbabwe.
Some of these include former Investec Asset Management, 91 Group, Sustainable Capital, Laurium Capital, Allan Gray among others.
Asked to share thoughts on these engagements, Bgoni said, “the concerns were on the repatriation which everyone agreed has improved with the auction.”
Not much more is known about what was said during the meetings.
But one of the visited institutions has since come out to share a report on Zimplats.
In a research note on Zimbabwe, South Africa based Coronation, also made comments about the country’s investment climate as a whole.
Coronation first highlighted the impact of Zimbabwe’s dark past where investor never got their money back.
Conversations with business executives revealed that Zimbabwe has completely disappeared off the radar of international investors.
“Many companies mentioned that no other investors had spoken to them recently – some had not spoken to investors in almost two years.
However, changes in the country over the past year were significant and the management teams in Zimbabwe are the most upbeat they’ve been in years.
On investment repatriations, Coronation revealed liquidity is the best seen in years.
“We regularly receive US dollars from the auctions and have received even larger amounts from the interbank market,” reads part of its research note.
On the performance of the ZSE, Coronation said while historically, strong share price performances in Zimbabwe have been a negative sign, usually driven by investors buying equities as a store of value when there were serious currency concerns. For the first time in years, “this performance is, instead, largely driven by fundamentals.”
Some valuations for ZSE listed stocks reflect overly pessimistic perceptions and present investment opportunities. But will portfolio investors return?