A speculator’s dream: Zimbabwe’s stock market unstoppable

Conventional wisdom states that the performance of a country’s stock exchange mirrors real economic output. Therefore it should hold that since our economy is performing dismally, our stock exchange’s market capitalisation should also be on the decline.

I started following proceedings on our stock exchange in the year 2003 and I have noticed that year on year returns always manage to beat high inflation. The Zimbabwe Stock Exchange is probably the easiest bourse to invest in if one is just interested in making paper wealth. This is because individual stock performances are not usually driven by the economic fundamentals faced by each stock counter. What has determined the appreciation of stocks for a time now are depressed interest rates, higher inflation expectations and a weakening local currency. Speculators have prepared a rough valuation about what each company should be worth in US$ terms. What they then do is to push up the share price of the counters until the valuation in local currency matches the valuation in US$ terms on the parallel market. This formula has been applied consistently over the past few years.

‘Analysts’ continue to attract many investors onto the stock exchange because “equities present the only other best form of investment in a hyperinflationary environment.” Their argument is bolstered by the fact that the majority of companies appear to produce results that manage to beat inflation, year after year, in spite of declining markets and reduced volumes.

Obviously, the top market participants – investment bankers, stockbrokers and other investment professionals – have managed to stay on top of the situation. But like I pointed out earlier, what seems to be driving the market right now is the perception that “equities present the only other best form of investment in a hyperinflationary environment. It would seem that the underlying economic fundamentals faced by the companies have been largely discounted in the valuation of these companies. Just how risky is this strategy?

Right now macro economic fundamentals are skewed but, assuming that the environment gets back to normal, is there going to be a market correction of some sort and what would be the effect?