I have seen a few conversations online lately about the price of assets such as houses in Zimbabwe continuing to show price reduction in US dollar terms. It is not my intention to wade into the “we do not earn in US dollars” debate, the US dollar is our real value unit. It was our unit of account for 10 years although the last few years involved some bond note or RTGS dollar confusion. None the less the US dollar remains a real value unit. It is not about being a superior currency but rather a more useful currency. Another case of such are values on the stock market. So why are these assets going so cheap? Should you buy?
In finance, there are methods used to value assets that can be summed up in one statement: the price of an asset is equal to the present value of its future cash flows. In simple English what you pay for an asset is the value of all the money you will receive for it in the future but paid out as a lump sum today. So in a simple example if you wanted to buy something that will give $5 a year for the next 10 years the nominal value would be $50 but for each year we must consider that $5 becomes less and less valuable due to inflation and other alternatives we had to use and grow the money. Also, read this article on the definition of assets to understand this better.
So what is depressing asset prices in the nation is their ability to bring future cash flows being hampered. Especially taking a look at the Zimbabwe Stock Exchange where we have business with plenty assets that are experiencing decreased valuations due to the ability to return good amounts. The average Zimbabwean company has taken a times 15 division (according to interbank rate) in its revenue. This doesn’t look good to an investor in any manner. They are stuck with the US dollar ban and have no way around it.
While real estate has ways around the US dollar ban for say rental incomes the fact remains that future returns forecasts for all businesses are hampered, in US dollar terms. The ZSE total market capitalisation is hanging at ZWL$30590707476, which is equivalent to US$1.98 billion on the interbank market or US$1.49 billion via the parallel market rate. A large company such as Econet currently trading at ZWL$1.73 (US$0.11 at interbank and US$0.08 on the parallel market) might signal a scramble among many, local or foreign.
So should you buy?
This question is hard to answer and you should, of course, seek advice from your qualified financial advisor for your personal circumstances. Buying such assets does work out very well for one set of circumstances; patient capital. While the country is currently in the doldrums economically speaking it cannot remain like this forever. We have been through something similar before and eventually rose from it. If you have money which has no foreseeable use for in the near future it may well make sense to buy into these assets and hold. If and when the conditions depressing the economy are dealt with the assets will readjust or self-correct in value (upwards of course).