Just like last year, the Zimbabwe Stock Exchange has had a blistering start to the year.
Last year, the ZSE’s market capitalisation closed the month of January up 46 percent, its best start to a year in more than a decade.
On Thursday it looked like the market would be just shy of that January 2020 rally. At the close of trading yesterday, the market capitalisation was 36 percent up at $430 billion. It’s likely to close slightly higher or lower today, the last day of trading this month.
The question for many is why the market is enjoying its best of times at the worst of times. Has the economy not taken a battering to scare away any investor?
In year 2020 companies did not operate at optimal levels, given the lockdown measures that saw economic activity coming to a halt for some.
The tourism sector, home to listed stocks like African Sun and RTG was the hardest hit.
Other listed entities such as Edgars, NTS, Truworths were at the mercy of lockdowns, more so between March and May 2020.
They are closed again this January.
The overall picture was, however, not all gloom and doom.
This publication has carried stories of many listed companies that sold more in 2020 than they did in 2019. At national levels, 2020 exports and import levels were just as those of 2019, an indication that the economy was not badly hit.
The economy’s frailness is probably from before 2020.
The years 2018 and 2019 were known as the years of austerity in which the economy suffered not only from policy makers’ decisions but also from natural disasters. In the end 2020, was not so bad a year amid the impact of Covid-19.
Investors would thus not be faulted if they were to say, they bought stocks into a strengthening economy.
There are, however, many other reasons for the 2020 stock market rally and the good start to this year.
High levels of money
Money supply levels have been a contributory factor.
Between end of January 2020 and January 15, 2021, Reserve Money jumped from $ 9,24 billion to $19,73 billion, a 114 percent year on year growth.
Reserve Money, which reached a peak of $20,76 billion for the week ending January 8,2020, has a bearing on what happens to markets.
In an environment where economic activity is subdued, cash rich individuals and institutions will turn to real assets with the stock market being the most liquid.
The result is a rally in stocks as we are seeing now and probably for the better part of the year.
Inflation and exchange rate depreciation are contributory factors.
The former, which peaked at 837 percent in July last year, and has started the year looking north at 362 percent is a key determinate of where local stocks are heading.
Inflation erodes the value of money, and to guard against it, those with excess cash will hedge in real assets such as stocks. This is what we saw last year and is likely to continue this year unless the Government and the central bank implement price stabilising policies.
In terms of the exchange rate. A weakening exchange rate drives cash rich entities into value preservation. While the exchange rate was kept stable for the better part of last year, the start to the year has revealed some weaknesses which might lead to an exchange rate depreciation.
The parallel market has already led the way and the auction system could follow suit as soon as next week.
At this week’s auction, close to 30 percent of successful bidders were left empty handed with no foreign currency allotments. They are likely to bid higher next week resulting in exchange rate depreciation. Rational investors would want to protect themselves from such and the stock market is a willing safe haven.
Limited investment options
The question that could have also led investors to the equities market is, what is the alternative?
Its possible investors think that stocks will be more valuable than other assets, like cash or real estate in the short to medium term. Stocks present the most attractive current investment option, so more investors are driven to that market.
Real estate investments are particularly unattractive at the moment, as retail, office, and residential real estate are all pretty uncertain prospects.
The money market is unattractive either. Reserve Bank of Zimbabwe (RBZ) has kept the bank policy and medium term lending rates at 35 and 25 percent, respectively. This is against inflation recorded above 348 percent for more than a year now.
Low interest rates are not only great for companies on the stock exchanges that are heavily borrowed but they prop up the stock market as investors look for a return.