ZSE ranked best African market

THE Zimbabwe Stock Exchange (ZSE) has been ranked as the best performing market in Africa in the last five years.

The local bourse has intermittently surged on the deterioration of economic fundamentals in the country, resulting in most investors preferring stocks to hedge against cash shortages and rising inflation.

According to InvestingInAfrica, the ZSE's return over the past five years, as of September 30, 2018, was 98,5 percent, topping 14 other markets on the continent.

The Namibian Stock Exchange was the second best performing market with a return of 38,5 percent while the Nigerian Stock Exchange, with a loss of 60,1 percent was the worst performing market on the continent over the period under review.

The performance of a stock market under normal circumstances is driven by expectations regarding company performance, which in turn tends to be related to the projected economic progression.

Zimbabwe's economy significantly slowed down in the last five years, but the market enjoyed a bull-run, which turned dramatic in 2017 when market capitalisation breached the psychological $15 billion mark for the first time since its inception in 1896.

"On a purely intrinsic value basis the shares prices were supposed to be declining as the economy and businesses underperformed but other factors also kicked in," Ranganayi Makwata, a local equities analyst said recently in an interview with The Financial Gazette.

"The stock market became a safe haven for investors and other economic players when the local currency, which many are calling RTGS dollars, began to lose value at a faster pace against the real US dollars. The ‘flight to safety' which ensued pushed share prices beyond intrinsic values in RTGS dollars terms," he said.

At the centre of the country's challenges, is the unsustainable high budget deficit. The financing of which has mainly been through domestic borrowing with the use of instruments such as Treasury bills, overdraft with the central bank, cash advances , arrears and loans from the private sector.

Experts say such financing mechanisms result in increased money supply in the economy translating into exchange rate misalignment and inflationary pressures.

"What worsened the situation was the massive growth in money creation by government, with the excess liquidity finding its way onto the stock market while some of it went into buying foreign currency for value preservation purposes pushing the prices of both assets even higher.

"So the bullrun was not being driven by perceived improvement in business fundamentals but by fear of losing value to inflation and currency depreciation," said Makwata.

In yet another crisis fueled bull-run, the ZSE last week reached a record $23 billion as ‘RTGS dollars' discount in the informal market breached extraterrestrial levels of 400 percent.

This latest surge, however, is not accounted for in InvestingInAfrica's calculations which were for the five years ending September 30, 2018.