Why is the ZSE "pricing-in" an Exchange Rate of 240
The first article showed a few backhand calcs, and explained the circumstances leading to this effective rate.
In this article, we explain why the ZSE will ALWAYS pace ahead of inflation and FX rates.
On the trillion ZWL dollar market cap, where are all these figures coming from? Where is the money coming from? There are three components to this meteoric rise.
Catch-up effect
Economic Growth
Exchange rate & Inflation
The Catch-up effect is the ZSE climbing back to its proper valuation region, reflective of fundamentals. Why the catch-up? Because since 2019, the ZSE has been chronically undervalued in USD terms.
Mean-reversion is at play. In 2020, there was a lot of catch-up to be down, leading to an incredible bull run. 2021 has witnessed a continuance pattern of that catch-up effect, though most of the catch-up was done in 2020.
I guestimate the 2021 catchup effect to be 10% in real terms, which is something around 116% in nominal terms. NB* these effects (catch-up, econ growth, inflation) are multiplicative rather than additive.
This catch-up effect is what @andrea_hoxbucks referred to as the correction. It is the market correcting itself. It had to happen irrespective of economic growth and inflation.
On economic growth, the country is growing in real terms. This is not debatable. Well, the rate of growth can be debated, and the rebasing of data by Mthuli to boost GDP figures by 40%, etc. can be debated. Growth is evident in sales volumes reported across counters.
The growth of the economy is estimated by IMF to be 5.1% for 2021. The MoF estimates this to be around 7%. This growth has to translate to the growth of the ZSE in real terms.
If there was no inflation, we could add 9though not additive) the econ growth rate (7%) and the catch-up effect (10%) to get a real ZSE growth rate of 17%. The 2021 catch-up effect can be more than 10%, depending on what one regards as the proper valuation level of ZSE.
The inflation and exchange rate factor contributes to the largest portion of the rise in ZSE. It is a hard-to-measure component. It can be inferred based on subjective assumptions, BUT, its existence cannot be refuted.
Instead of the ZSE, people used Old Mutual shares last year, due to their dual listing to gauge the inflation & exchange rate effects. This led to the ban on the trading of Old Mutual shares. I wrote a few notes on it.
The Suspension of Old Mutual shares on the ZSE Pending Delisting
The suspension of OM shares was not the suspension of the fundamental factors that led to the rate. The fundamental factors still exist. The entire ZSE is reflective of that rate, even though the rate is not revealed in a naked manner, like what the OM Implied rate did.
So, if RBZ wants to stop this ZSE implied rate from existing, they have to suspend the ZSE altogether. Big guys (corporates) and small guys(retail investors) are all piling into the ZSE to take advantage of its usefulness as an inflation hedge.
Let's say the value of ZSE in USD terms is 10 bn, and that the market cap has reached that level now, i.e. all the catch-up has been done. And let's say the economy is not growing anymore i.e. econ growth at 0%. Does that mean the ZSE rally stops? Hell No.
The Expected Inflation and "Priced-in" Exchange Rate have their say. The ZSE grows in line with these.
As long as:
RBZ keeps printing
Confidence in local currency is low the ZSE will continue marching upwards.
That’s why it’s a never-ending rally. The ZSE rally is guaranteed by the Central Bank. It is underwritten. RBZ is the underwriter of the ZSE rally.
By keeping the printers at Fidelity on print mode all the time, the RBZ inadvertently issues an unconditional guarantee of the success of the ZSE. And the ZSE is the only game in town where one can exploit the RBZ printer without having connections to those in power.
If you have good connections and relations you can arbitrage the differences between the official command auction rate and the parallel market rate. If you don’t have connections, you can simply buy the ZSE and wait, your value goes up faster, beating inflation by a distance.
The rally can stop being an inflation hedge if:
RBZ curtails money supply growth significantly
The entire ZSE is shut down, not merely suspending certain tickers
Both of these are highly unlikely. Another danger is the banning of corporates from participating in the ZSE. Behind the nominee buy orders ( think of Stanbic Nominees etc.) lies a swarm of corporates that take 80% of their cash balances and park them on the ZSE.
These corporates are big participants, and eliminating them from the market via forced selling can drive values down. However, beyond the initially forced selloff, the ZSE will rise again fueled by individual investors.
Because the economy is a Complex Adaptive System, funds that sit on corporate balance sheets will find their way to individuals and eventually to the ZSE, guaranteeing the inflation-beating rally. This is because the ZSE is the only game in town accessible to all.
The ZSE rally and its ability to act as an inflation hedge, just like how house prices ride ahead of inflation, is unwillingly guaranteed by the existence of an unsound RBZ. The value preserving qualities can only be wiped away by killing the ZSE or killing the currency.
Killing the ZSE is probable but highly unlikely. The same goes for killing the currency. Reforming the notorious RBZ is also probable but highly unlikely.
That is why, on a scale of probabilities, the ZSE will continue to exist, and will continue to be the best inflation hedge. Number one in value preservation.
Ciao!