The Zimbabwe Industrial Index, which is the main index on the exchange that contains every company except for a handful of mining stocks, is up almost 64% on the year in USD terms. The next best stock market, Latvia’s OMX Riga, is up a mere 52% on the year making Zimbabwe the runaway leader of 2017 so far. Since the index itself is denominated in USD, its performance has come without the currency boost that many other indices in 2017 have benefited from.
The Zimbabwe Stock Exchange’s impressive run this year has come from a low base. It started the year with a market capitalization of just under $4.3 billion and is worth just over $6.7 billion now. In comparison, News Corp, the smallest company on the S&P 500 in the US, has a market capitalization of $7.9 billion by itself. However, this still marks an all-time high in the index since Zimbabwe switched back to using the USD in 2008.
Broad Rally Across The Zimbabwe Stock Exchange
The index contains 58 different companies and the performance this year has not been isolated to a few names. On average, each company has gained over 87% on the year. CFI Holdings, a company engaged in various activities including retail, property, and poultry, has led the way with a 606% gain on the year!
But the gains would all be for naught without the strong performance of Delta Corporation, the largest stock on the exchange by market cap with a 26% weighting on the index. Delta Corporation is the largest brewer and beverage distributer in the country. However, it recently announced 10% lower revenues than last year, and it has been unable to pay dividends due to a cash crunch affecting all of Zimbabwe. Yet the stock has gained 61% on the year.
So if stocks are rallying despite worsening financial results, what is driving the rally?
Cash Shortages Dominating The Market
While official inflation is almost non-existent according to the latest government results, there are massive cash shortages facing the entire market with USD in short supply. Zimbabwe already uses many different methods to stretch the USD they do have as much as they can. One way is by introducing real time gross settlement transfers (FTGS), creating an electronic currency market that is used by many individuals. However, dollars on RTGS no longer trade at par with real USD, and was quoted at a 26% discount recently with withdrawal wait times measured in weeks.
Bond notes were also introduced in November 2016 in an attempt to find greater USD liquidity, backed by an offshore fund. However, these notes soon traded with a discount as well as mistrust permeates the system, and many investors and banks are trying to reduce exposure to them. The risk of default on these bond notes is growing by the day.
When Cash Is Not King, Equities Become A Safe-Haven
That is why stocks have stormed higher despite paltry revenue growth and frozen dividend payments. In a market where government paper and the currency itself is suspect and declining in value, equities have taken on safe-haven status with many investors rotating their money into equity allocations.
We are seeing similar price action in Venezuela where the currency has devalued from hyperinflation. Despite Zimbabwe officially operating in USD, the growing amount of USD Bond Notes outstanding has circumvented dollarization efforts and stocks are the main beneficiary. Just know that it is unlikely that any foreigners will be able to get USD back out of the market anytime soon.