ZIMBABWE’S capital markets are witnessing a whirlwind of activity that warrants a moment of introspection. In this last quarter of 2024 alone, significant developments are reshaping the markets landscape.
One notable event is the delisting of National Foods from the Victoria Falls Stock Exchange (VFEX). Just two years ago, this food manufacturing giant transitioned from the Zimbabwe Stock Exchange (ZSE) to VFEX.
Who envisaged that it would voluntarily exit the foreign currency denominated bourse, for reasons including limited trading activity and cost-efficiency concerns?
Adding to the shakeup, Old Mutual issued a circular to unit holders of its Old Mutual Top Ten Exchange Traded Fund (OMTT ETF), seeking approval to terminate its listing on the ZSE.
This decision will be tabled at an extraordinary general meeting scheduled for December 12, 2024. The departure of OMTT from the ETF space is especially striking since ETFs were first introduced to the ZSE in January 2021, spearheaded by Old Mutual's OMTT.
This paved the way for four additional ETF listings which then entered the space: The Morgan&Co Multi-Sector ETF, Cass Saddle Agriculture ETF, Morgan&Co Made in Zimbabwe ETF, and the Datvest Modified Consumer Staples ETF.
Four years later, the OMTT ETF is bowing out, citing low trading volumes, unappealing counters, and heightened tracking errors as major reasons.
This followed multiple attempts to rebalance the ETF, at least four times, to align with the performance of the ZSE’s top 10 largest companies by market capitalisation.
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Looking at the broader context, Old Mutual’s retreat comes amid a market environment already marked by home grown challenges. It has been nearly five years since shares of Old Mutual and PPC were suspended on the ZSE over fungibility concerns tied to parallel market rate fluctuations.
Despite these suspensions, parallel rates continued to spike, culminating in the eventual replacement of the Zimbabwe dollar with Zimbabwean Gold in April 2024, as the official rate hit US$1:ZW$30 000 on the official market. The parallel rate surged to US$1:ZW$40 000.
Understanding ETFs: Why they matter
ETFs allow investors to buy into a fund composed of multiple assets or securities, offering diversification in a single transaction. These funds often track specific indices and span various asset classes, such as commodities, bonds, and shares.
Quality of constituents, cost effectiveness and safety of investors are attributes that generally distinguish a great ETF from others. In more developed markets like South Africa, ETFs have evolved significantly since their introduction in 2001.
Investors there can even use tax-free accounts to invest in ETFs, avoiding taxes on dividends, capital gains, and interest — benefits that remain unavailable in Zimbabwe.
The delistings of National Foods and OMTT ETFs, alongside longstanding market inefficiencies, underline the need for a deeper examination of Zimbabwe’s capital markets.
These challenges present an opportunity to rethink strategies, improve regulatory frameworks, and address systemic barriers to market growth and investor confidence.
As we dissect the reasons behind these developments and explore potential solutions, one thing is clear: Zimbabwe’s capital markets are at a critical crossroads.
Thin trading volumes
By the end of 2023, both the ZSE and VFEX posted their worst performances since 2019. Annual traded values plummeted, with the ZSE and VFEX declining by 51,45% and 64,59%, respectively, compared to 2022.
This downturn left both exchanges on shaky ground entering 2024. Trading volumes on the ZSE for the half year ending June 30 2024 declined by a staggering 86% compared to the same period the previous year.
The Old Mutual Top Ten (OMTT) ETF was not immune to this downtrend.
Less appealing counters
Since the OMTT ETF’s launch in December 2020, 11 counters delisted from the ZSE, including high-profile names like Axia, Innscor, National Foods, Padenga, and Simbisa.
Many of the remaining counters on the exchange are thinly traded, with several signalling intentions to migrate to VFEX for better prospects.
With Tanganda now planning to delist from the ZSE and move to VFEX for capital raise, it’s not difficult to foresee the implications this shift will have on the remaining ETFs. Here is how the OMTT ETFs composition has rebalanced over the years:
Heightened tracking errors
The OMTT ETF’s objective was to replicate the performance of the ZSE’s top ten companies by market capitalisation.
However, frequent changes in the composition of the Top Ten Index, coupled with limited activity on the bourse, made accurate replication increasingly challenging.
The fund faced significant tracking errors, undermining its effectiveness as an investment vehicle.
In conclusion, companies like Delta surged to dominate both market and ETF weights, reflecting the growing concentration of liquidity in fewer counters.
The combination of thin trades, an exodus of key counters, and heightened tracking errors underscores the structural challenges facing ETFs on the ZSE.
Without bold reforms to address perennial cycles of underperformance and on-going delistings, diminished market appeal is likely to persist.
Taimo is an investment analyst with a talent for writing about equities and addressing topical issues in local capital markets. He holds a First Class Degree in Finance and Banking from the University of Zimbabwe. He is an active member of the Investment Professionals of Zimbabwe community, pursuing the Chartered Financial Analyst charter designation.
