The Zimbabwe Stock Exchange market capitalisation reached the trillion dollar mark this week as investors; amid limited investment options, growing money supply, and a depreciating local currency continued to look for a safe haven for cash holdings.
The last time the equities market’s value was above $1 trillion was in 2008 at the height of hyperinflation.
In fact, using trillion is dwarfing the figure.
For the 10 months to October 2008, just before the ZSE’s suspension, shares worth $4,414 quintillion changed hands.
While the latest milestone is exciting for most investors, who have seen their portfolios record double digit growth (225 percent for the All Share Index), for some of us, the number or the word trillion also evokes memories of hyperinflation.
Back in November 2008, we witnessed an almost similar rally in stocks.
Share prices would triple or quadruple in just one day. Those days there were two trading sessions, one in the morning and one in the afternoon.
One could buy in the morning, and by afternoon the value would have tripled.
In fact, at that time ZECO Holdings was trading at a share price of $15 trillion.
Big companies like Old Mutual were trading in quadrillions.
But back then, inflation was also galloping, much more than what it is doing now. Officially we stopped counting inflation at 231 million.
What we thought were huge returns, were just worthless paper.
Maybe that’s what can give us comfort. Inflation is only 51,55 percent at the last count in September.
We are a long way before we can think of four figure inflation numbers, although we nearly got to that level when annual inflation reached 837 percent in July 2020.
What can also give us comfort is the fact that the productive base for listed entities is either stable or growing, unlike in 2008 when the productive base was shrinking.
Most of the results recently reported by listed entities show growth in volumes. Cement manufacturers are even failing to meet demand.
Currency depreciation is, however, still a major threat.
Rates that were being quoted yesterday (Thursday) would push inflation further up. Stocks too will rally, but will they continue to beat inflation as we have seen so far in the year with the All Share Index gaining 225 percent ahead of year-to-date inflation of just above 30 percent.
While it is good that stocks have given investors inflation beating returns, a much stable pace, that is driven by fundamentals, is what I would prefer.
Investors should prefer sustainable earnings, that are not continuously eroded by inflation.
This year alone, while the ZSE has largely been on an upward trajectory, its real value has been volatile.
At some point mid-year, the ZSE’s valuation closed above US$6 billion, but as the Zimbabwe dollar depreciated, so did the ZSE’s US dollar valuations.
On Wednesday when I calculated the ZSE market cap using a parallel market rate of 175, the value stood at US$5,7 billion, but as I wrote this article, the local currency had depreciated on the parallel market.
The ZSE’s valuations also followed suit. It will would take another rally, for the ZSE’s valuation to go back to US$5,7 billion.
That’s why I prefer, a market that rallies based on economic and company specific fundamentals.
The current rally is driven by many things, fear, speculation, fast paced money supply growth, and strong economic growth.
However, it does not guarantee good returns, its susceptible to volatility.