Confidence in the local capital market is projected to wane after government’s controversial directive to suspend the fungibility of three counters listed on the Zimbabwe Stock Exchange (ZSE).
On Sunday, Finance minister Mthuli Ncube suspended for a year the fungibility of three of the dual-listed stocks on the ZSE — Old Mutual (OML), PPC and SeedCo International. There are eight stocks on ZSE which are fungible.
The ZSE all share was down 3.3% and the Top 10 lost 4.4% on Monday.
Top losers on the first day of trading soon after the announcement were OML, ART, RioZim, Meikles, and Truworths. OML and PPC dropped 10.84% and 10.04% respectively on Tuesday.
A Harare-based investment analyst said the suspension amounts to government shooting itself in the foot as it effectively erases Zimbabwe’s equity markets from the radar of frontier markets investors.
As a result, foreign activity on the Zimbabwe’s capital markets is expected to be limited.
“Remember that Africafocused funds were basically using fungible stocks to enter and exit the Zimbabwean market given that the interbank market really didn’t serve the purpose of existing portfolio investments.
“Really we believe we are going to see a lot of investors being trapped and then we can only switch positions,” the analyst said, adding no new foreign money is expected to come in on the stock market under such conditions.
“Another negative impact is that it discourages portfolio inflows on the ZSE and Finsec which means that it will be very unattractive for issuers for example companies that will then want to raise new capital.
They won’t find any foreign money on the ZSE or Finsec since we have excluded foreign investors, so that’s sort of a sad story for your ZSE and Finsec there.”
The move, market watchers said, will also affect confidence and reduce foreign direct investment given that investors who participate in the capital markets normally also chase private projects through direct investment.
It is also expected that the depth of the local capital markets will be negatively impacted as foreign investment contributes significantly and taking away dual-listed stocks will result in value traded declining.
In turn, the government loses income in the form of taxes from market activity.
Going forward, he said, the price of OML shares is expected to dip on account of reduced foreign demand.
Economist Rutendo Masawi said the removal of fungibility means the OML share no longer offer benefits to investors from SA and or the UK, therefore share price will tumble, as prospects are lower than the other London and Johannesburg markets.
On the bright side, the removal of fungibility could kill the implied exchange rate that would work as a lead indicator to local forex traders.
“This should remove speculation and stabilise the local exchange rate. But the markets are rational and people will still unofficially reference to the implied OML rate, the results may be too dangerous” Masawi said.