The Sunday Mail
The equities market faltered last week to Thursday with investors losing a cumulative $3 billion post the suspension of fungibility of dual-listed stocks.
Treasury boss Minister Mthuli Ncube suspended Old Mutual’s fungibility together with that of Seed Co International and PPC Limited that are listed on other exchanges, in addition to the Zimbabwe Stock Exchange (ZSE).
Old Mutual is also listed on Johannesburg Stock Exchange (JSE) and London Stock Exchange while Seed Co international and PPC are present on the Botswana Stock Exchange (BSE) and JSE respectively.
This means their shares could be bought on the ZSE and sold on foreign markets, which authorities believed was distorting the value of the local currency as speculators used its implied value to determine the exchange rate. A week after announcement of the measures, the primary indicator, the ZSE All Share Index, closed 4 percent weaker to 474,42 points from 494,79 points in the prior week. Total market value eased 4 percent to $60 billion from $63 billion recorded in the prior week.
For Old Mutual, the insurance giant fell 28 percent to close at $38 from previous week’s $52,97 while PPC was also on the downside with an 18 percent decline to $4,50 as the cement maker also indicated sales volumes fell for the 11 months to February 2020 on subdued demand. On the other hand, Seed Co International recorded gains of 4 percent to $5,01. The declines in Old Mutual and the impact on the overall market performance is in line with analysts’ projections. Market watchers see its share price shedding on a short term sell off, although the persisting inflationary pressures will eventually push the price up again. Apart from its fungibility, Old Mutual remains a strong counter and one of investors’ favourites due to its strong business as well as consistent dividend policy.
“There is likely to be a short-term selloff which will shave Old Mutual local price as investors who had bought the stock with a view to exit the market offload their positions.
We see the price easing by circa 15 percent over the next four weeks before stabilising and even recovering. Holding the JSE price constant, this gives an implied OMIR of 1:47 which is closer to the parallel rate. We note that the price of Old Mutual is not entirely based on its fungibility,” said analysts Equity Axis.
For the overall bourse, Equity Axis contend that: “We see the disposals from OM providing free flows which investors will partially look at investing in some non-fungible counters. While this portion of flows may be relatively lower than flows directed at exiting Zimbabwe, we see a substantial amount moving to buy other counters.”
While Old Mutual accounts for only 3,85 percent of the market’s total value, the stock has significant material impact on the local bourse. In 2019, it was the most liquid stock on the bourse accounting for 20 percent of total value traded as investors used the stock as a hedge against economic volatility.
As a fungible stock, it became a vehicle for repatriating investments out of the country, at a time foreign currency has been scarce and therefore difficult for investors to repatriate their funds.
“As Zimbabwe continued to struggle to remit foreign payments on the back of an acute shortage of foreign currency, the fungible Old Mutual stock became a quick favourite amongst investors for remittances, even the introduction of a 90-day vesting period did little to suppress appetite for the Old Mutual stock,” said stock brokers EFE Securities in their 2019 Review and 2020 outlook report.
The recent directive by Treasury is not the first of its kind. As part of measures to tighten exchange control measures and stem the local currency free-fall, the Reserve Bank of Zimbabwe announced last September a 90-day vesting period before which fungible stocks could be moved outside Zimbabwe.
In 2008, at the height of hyperinflation, RBZ suspended fungibility of dual listed stocks, with the same view to stem exchange rate depreciation as this was believed to distorted the real value of local currency through speculative purchases. Zimbabwe has been battling foreign currency shortages for years now, which has affected businesses from across sectors resulting in some sourcing such from unregulated channels.
Last year, Government introduced the interbank market for foreign currency to make it more accessible through official channels, but has still remained limited. The official interbank market rate is currently pegged at $24,9 against the US dollar while the illegal parallel market is trading above $40.