|Economic Times sent out questions to Farai Gwaka the general manager investments at Zimnat Asset Management Company and his team in order to discuss some issues of 2022 trading. We also asked about what they think should be made better in order to grow our markets as well as increase participation on the markets.|
Please find below their responses to the questions:
1. The issue of regulation, that is the capital gains drama.
Our view is that, the higher the cost of transacting on the ZSE the less desirable and illiquid the market will become, which will negatively affect price discovery. If you look at the cost of transacting on the ZSE versus our regional and international peers, we do not rank favourably in terms of affordability, making the market less attractive to both local and international investors.
Whilst we understand government’s intentions when they increased the capital gains withholding tax (CGWT) to 4% for vesting on the market for less than 270days, as market participants we feel that the decision was a bit heavy handed, and ultimately has chased away most retail investors, who play a critical role in price discovery and market liquidity.
These retail investors, will ultimately find new and in some cases unregulated markets to deploy their funds such as the parallel market or regional and offshore equity markets, which present government with more problems and reduce their tax revenue base. In addition, foreign equity investors who have since left the market over the last couple of years will also not be keen to return to the ZSE under such punitive regulations.
We therefore recommend that the vesting period where a CGWT of 4% is payable be reduced in the short run to at least 90days, but ultimately it must be totally removed, to restore the ZSE’s competitiveness from a domestic, regional and international perspective.
2. The issue of gold coins and interest rates, how they affected the market
The introduction of gold coins in our view, did not have a material impact on ZSE, mainly because of their lack of availability of the coins to institutional investors such as pension and insurance funds. Therefore, whilst the gold coins presented a good diversification, and value preservation alternative to investors, there were not enough gold coins accessible to institutional investors to enable them to switch from other assets to gold coins.
The increase in interest rates to 200% in our view had a significant impact on the performance of the ZSE, as this tightened ZWL liquidity across the economy, given the punitive cost of borrowing. Given the hyperinflationary environment, speculative investors had taken advantage of the sub-inflation lending rates to borrow ZWL and speculate on the ZSE, therefore when rates were adjusted to 200%, that arbitrage opportunity was eliminated, resulting reduce inflows onto the ZSE, whilst in some cases some had to sell shares to pay back their now expensive loans.
In addition, higher interest rates meant higher yield for money market and other fixed income investments, which disincentivized investors from switching to ZSE, which at that point was looking relatively overvalued.
3. New products on the market and their prospects
New products such as exchange traded funds (ETFs), real estate investment trusts (REITs), amongst others, in our view, is the beginning of an exciting new chapter for the ZSE and VFEX. We strongly support these new innovative product offerings and they expand asset offerings, deepen market liquidity and sophistication.
We therefore commend government through SECZ and the ZSE, for supporting the required amendments to the Collective Investment Act, which have made these new innovations possible.
An area of keen interest in terms of development, going forward, is the local bond market, which in our view is a sleeping giant, as compared to our regional and international peers.
4. Lastly, the migration to VFEX, how bad is it for ZSE and what is motivating it.
If one compares the policy thrust and incentives between the ZSE and VFEX, it is clear, in our view, that the ZSE is likely to be cannibalised by the VFEX in the near future. Most companies that list on a stock market are looking to either raise capital or provide liquidity in real terms to existing shareholders, none of which is being achieved on the ZSE at this juncture.
Therefore, the VFEX’s currency of trade (USD), combined with other policy incentives, make it a logical destination for any local and possibly some international companies, to raise capital or to list by introduction.
The VFEX is also exempt from CGWT and its cost of trading is much lower than the ZSE, making it more attractive to all investors, once the universe of listed companies increases, a development that is likely to happen sooner, looking at the current trend.
Therefore, in our view, the VFEX is likely to be the dominant stock market in the country, in the next few years, whilst the ZSE will have to reinvent itself to remain relevant to companies listed there as well as to investors – Harare