Investing. It’s hard enough in the most successful of economies to pick the right investment vehicle. Over the last couple of years the ZSE has provided great returns. In a country beset with macroeconomic problems and high inflation the complexity of the investment decision can only be compounded by these factors. In this article we’d like to investigate if investing in ZSE shares can offer inflation beating returns.
Hedging & The inflation problem
One of the basic principles that underpins long term investing is the time value of money. Simply put a dollar today is worth more than a dollar tomorrow. Therefore investors or lenders compensate a benefactor for their money. The investment should pay off enough to beat the annual rate of inflation and some extra return or growth for the investor. Given the fast rising inflation rate in Zimbabwe and the major gains seen on the ZSE the question begs if the ZSE is an inflation beater.
Comparison of ZSE vs Inflation
The rationale for choosing to look at the specific period is that it is information gathered during the existence of the bond note and the period of the emergence of the parallel market for US dollars, which were previously believed to be at par with bond currency. Unlike 2018 it was not an election year and aside from the change in presidency in November there were no big shocks to the market from outside it.
In the graph we see the movement of the ZSE as a whole index pitted against the inflation figure. You’ll see that while at times the ZSE line is over the inflation line it does not last for long. The dotted lines provide the answer to our question. As we see the inflation line is always just above ZSE line, they in-fact run parallel. So simply put the inflation rate is always ahead of any gains in the ZSE in the long run.
The monetary problem
We need to look at both our inflation rate and asset pricing through a different lens. While the generally accepted definition of inflation is the annual increase prices that is not exactly what is at play in Zimbabwe. There has been no real shift in the supply or demand for any goods but the source of our inflation is rather the fall in value of our money.
This has of course also reflected in the pricing of shares on the ZSE. Their values have grown as a result of the unit of measure. While these may be called US dollars for reporting purposes general consensus is they are not equal to US dollars but are in fact something else (RTGS or electronic bonds). What this means is when you adjust for the depreciation of our bonds (and RTGS) you get a real rate of return which is less flattering if at all.
Results may vary
While we have chosen to look at the ZSE as a whole results may vary by picking an individual counter or a weighted portfolio. Some shares or combinations of may give higher returns than inflation. So it is possible to beat inflation via the ZSE.
While sophisticated investors may have the tools in their hands to work out inflation beating portfolios the task may prove difficult but not impossible for the average investor.