When the Zimbabwe Stock Exchange bubble comes crashing, and it will, there will be chaos

Zimbabwe Stock Exchange Headquarters

Those without sticky memories may recall that bull runs on the local stock exchange are not something new. In 1979 The promise of a ceasefire stemming from the successful conclusion of the Lancacster House talks, with the potential to stabilise Zimbabwe following years of conflict, ushered in a bull run on the stock exchange that was to last until early 1981. In fact, by November 1979, the Industrials index had surpassed its previous record high achieved in 1974, doubling from levels reached in 1978. On the other hand, the market capitalisation of the counters on the Mining Index had more than tripled.

Flash forward a couple of years down the line, while the financial markets across the world were reeling from the Wall Street crash of October 1987 – dubbed “Black Monday”, the Zimbabwe Stock Exchange (ZSE) was flying high, unperturbed by the calamity stalking other global markets then. The ZSE rose so much so, in 1988 it was the only stock exchange in the world to reach a record new high.

Similarly, in 2008, while the rest of the world`s financial markets were battered and bruised by the Global Financial Crisis, the ZSE surged full-steam ahead, unscathed by the seismic turmoil engulfing other markets. For instance, on Tuesday 21 October 2008, the ZSE`s benchmark Industrial Index soared 257 percent up from a previous one-day record of 241 percent recorded on Monday the 20^th, with some companies seeing share prices increase by up to 3,500 percent. In this instance however, this rise was not driven by Zimbabwe`s attractiveness as an investment destination, nor the solid fundamentals of listed companies. 

Many investors actually flocked to the stock markets to hedge against the runaway inflation that threatened to wipe away value of investments, what with inflation coming in at a record 231 million percent. Then ZSE chief executive, Emmanuel Munyukwi at the time quipped, “Why leave money in the bank? People are forced to come on the stock market. They believe that after hard currency, the stock market is the only viable option where you can get a bit of a return.”

This then, shows that Zimbabwe has had its fair shares of bull runs, or bubbles, depending on your risk aversion. News that the ZSE had reached an all-time high market capitalisation of $15 billion, more than 90 percent of the country`s GDP, made the rounds after last Tuesday`s trading session. Albeit with parallel market USD premiums of 80-85% being charged, this implies a market capitalisation of around USD8 billion. Year to date, the ZSE`s market capitalisation has increased by some 274.33 percentage points, and given the structural economic deficiencies prevailing in the country, it is evident that the bourse Is overvalued although some may argue still cheap in USD terms. Which then begs the question, when will this bubble burst, and when it does, just how many will be left scarred?

Pension funds, insurance companies and individuals alike have sought the refuge offered by the stock market as the economy continues to falter. In addition to storing value, most are also buying stocks in the hope that someone will be willing to buy the same stock at a higher price at some point in the future - a phenomenon economists like to call, “The Greater Fool Theory.” Some quarters might argue that the “greater fool” in Zimbabwe`s current scenario is the person who is not buying stocks at this moment in time. But the age old argument still holds that it is one thing to get into an asset bubble and it is an entirely difficult thing altogether to get out of it with one`s wealth still intact.

In the coming heady days should there be even the slightest reason for some investors to exit the stock market and realise their RTGS balances wealth, or should there be another avenue to put their phoney money to better use – something which cannot be altogether difficult to fathom given Zimbabwe`s highly fluid regulatory environment, the ZSE would simply dry up and prices would crush. This would then signal the bursting of the stock exchange bubble, and those who have been swimming naked will be left exposed.