John Mangudya: Forging ahead with plans to introduce bond notes. Picture: GETTY IMAGES/AFP/JEKESAI NJIKIZANA
John Mangudya: Forging ahead with plans to introduce bond notes. Picture: GETTY IMAGES/AFP/JEKESAI NJIKIZANA

The bulls are back in town, if the gains recorded on the Zimbabwe Stock Exchange (ZSE) last month are anything to go by.

After a depressed first-quarter performance — the mainstream industrial index declined by 3.83% — stocks have made a major comeback.

The decision by the Reserve Bank of Zimbabwe to lower rates last year hit banks’ earnings. In addition, uncertainty in the currency market caused by the introduction of bond notes has led investors to take positions in equities.

Amid concern over rising inflation, the stock market is proving a safe haven for individuals and asset managers. Just last month, the mainstream industrial index jumped 16.8% to close at 162.34 points, a development that analysts say signals the beginning of a bull run.

The mining index did even better, rising 18.9% to close at 69.63 points, lifted by gains in heavyweights such as RioZim.

Analysts say issuances of bond notes, a local currency the central bank claims has a par value to the US dollar, are fuelling inflation. April inflation rose to 0.5% from 0.2%, a worrying development for investors.

The International Monetary Fund expects inflation to close the year at 5%.

Economists believe this is the beginning of an upward inflation trend, reversing a state of deflation when Zimbabwe adopted the use of multiple currencies in 2009.

With bond notes now accepted as legal tender because of biting cash shortages stemming from low foreign currency remittances, limited foreign investment into the country and low exports — the traditional sources of foreign exchange — investors and individuals are opting to hold onto shares to preserve value.

But does the equities market still have an upside? Analysts expect prices to keep rising.

"It’s now an issue of how long it will last," MMC Capital co-founder Itai Chirume says.

May’s gains are evidence of yet another rally that comes less than six months after a bull run in the fourth quarter of last year, which was triggered by news that central bank governor John Mangudya was forging ahead with plans to introduce bond notes. In addition, a glut of treasury bill maturities in April meant money had to find its way into other asset classes such as shares. And the money market has not proved attractive.

"Investment returns are low on the money market after the [reserve bank] capped the lending rate at 12%. This means there is not much incentive to keep funds in the money market," Chirume says. "Returns for money are very low while there is a lot of pressure on these monies to find an investment home."

Stocks seen as blue chips have had a fine run on the ZSE. Zimbabwe’s largest mobile network operator, Econet Wireless Zimbabwe, founded by billionaire Strive Masiyiwa, was the centre of attention for investors after closing a US$130m rights issue.

British America Tobacco Plc’s local operation has been on the rise, along with other counters, and is trading at a premium to its book value and a p:e multiple of 44. On a quarter-to-date basis, Econet is up 90%.

However, Chirume says the party might end as government introduces bonds to the market. "This could slow equities ... Depending on how much paper comes to the market, we will see some of the money being split between equities and this paper," he says.

Others say the market is testing its resistance after peaking in 2013, an election year.

"We are approaching elections and the last time we had an election, we experienced a peak point for the market. A look at the reporting season shows that a few companies are doing well in terms of earnings, such as [retailer] OK. Also, asset managers are getting a bit of funds from clients," says an investment analyst with a stockbroking firm. "We could see the market rallying right through the end of this quarter. After that, we could see a bit of profit taking."

More worrying is that cash shortages have resulted in banks failing to pay for imports.

"The market doesn’t have sellers at present. Investors are holding onto every share they have. We see strong buying appetite, pushing the ZSE up in the short term as buyers pay a premium," another analyst with a leading stockbroking firm says.

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