SECURITIES firm, Morgan & Co, has predicted a liquidity squeeze on the Zimbabwe Stock Exchange (ZSE) which will affect the trading of shares on the bourse.
An immediate effect of increased volatility is that fewer participants are actively buying and selling securities.
This lack of activity means that even small trades can lead to significant price fluctuations, making the market more unpredictable and potentially riskier for investors.
Additionally, with reduced liquidity, it becomes more challenging to execute large orders without affecting the market price, further contributing to instability.
“ZiG liquidity injections that resulted from payments to contractors between June and July, underscored the ZSE’s bull run in the last two months. This has also resulted in several stocks on the exchange like Delta Corporation Limited, Econet Wireless Zimbabwe and Nampak Zimbabwe exhausting their potential upside,” Morgan & Co said in its 2024 Mid-Year Economic Review Analysis report.
“We opine that these payments will slow down in the coming weeks in an effort to contain the impact of increased ZiG liquidity on parallel market rates. Further, the central bank will begin mopping excess liquidity too as a way of ensuring currency stability. This all points to a liquidity squeeze on the ZSE in the remaining months of 2024.”
The research firm said the ZSE had witnessed a strong rebound since the end of June after being heavily depressed for the most part of the first half year period.
“In US$ [terms], the Morgan & Co ZSE All Share Index doubled in value. This was attributed to temporary injections of ZiG liquidity coming from payments to contractors in the last couple of weeks,” Morgan & Co added.
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“While there are still more payments yet to be done, our sentiment is that the current level of liquidity is temporary and the recent rally on the ZSE will likely reverse soon.”
According to Treasury, total turnover at the ZSE for the month of June, stood at ZiG99,8 million, a 500% increase from ZiG16,6 million as at April 30, driven by the introduction of ZiG.
This followed the rebasing of the ZSE indices upon the adoption of the ZiG currency.
Since the adoption of ZiG, the market capitalisation more than doubled to ZiG59,01 billion as of the end of last month, from ZiG25,6 billion in April.
“We recommend stocks that operate as market leaders in their respective industries and also exhibit the following qualities; low liquidity risk, strong or growing US dollar revenues, and strong upside potential,” the securities firm said.
“We identify Econet Wireless and SeedCo Limited as counters with most, if not all, these characteristics and we recommend them as our top picks in the second half of the year. We also add that investors can make bets on the Morgan & Co Multi Sector ETF [Exchange Traded Fund] and the Morgan & Co Made in Zimbabwe ETF which currently trade at respective discounts to net asset value of 54% and 66%, respectively.”
