ZSE investors once again will feel the wrath of a government that is desperately trying to defend the local currency and curtail inflation which has been rising lately. Much more than anyone in the economy is comfortable with. After Chris Mutsvangwa’s utterances were turning up the heat on the ZSE the government finally swung the axe through President Emmerson Mnangagwa’s Saturday address with measures that touched many sectors of the economy. Some time in the address was spent focusing on the ZSE and we will look at the measures in terms of the ZSE and what they mean going forward.

Chris Mutsvangwa pointed the spotlight

The outspoken Chris Mutsvangwa is no stranger to taking digs at the capital markets. Towards the end of last year, Mr Mutsvangwa made noise about the Old Mutual Top Ten ETF and how it had continued the same practices that Old Mutual Group has been accused of before being suspended from the ZSE in June 2020 to date. Old Mutual Group was accused of influencing parallel market rates through the Old Mutual Implied Rate which saw users implying a Zimbabwean dollar exchange rate by comparing prices of Old Mutual on other exchanges it was listed and deriving an exchange rate.

Mr Mutsvangwa accused the OMTT of being used in the same way though it does not enjoy fungibility as the Old Mutual Group did. A few months down the line Mr Mutsvangwa launched another salvo at the ZSE claiming it was being abused and playing a part in determining the parallel market exchange rate. Mr Mutsvangwa has said much but it is very hard to make sense of it. What we know for sure is that it has been possible for people to seek refuge on the ZSE which year to date has beaten any measure of inflation available in the market. The ZSE imposed its rule changes by tightening circuit breakers in an attempt to stave off the attention of regulatory authorities. However, the attention of the authorities eventually fell on the ZSE. While the worst-case scenario was another closure the measures announced still hit hard.

Account activity and monitoring

The following measures were announced with regards to ZSE custodian and brokerage accounts;

  • Prohibition on inter (broker) account transfers
  • Third-party funding of client sub-accounts prohibited
  • Transfers out of client accounts will only be allowed to their bank accounts
  • Regular and continuous monitoring through an electronic system is to be established.

These moves are intended to tighten the movement of money in and around the Zimbabwe stock exchange. You do wonder why some things were allowed in the first place such as third party funding and moving money between subaccounts. More regulation of the markets is always welcome as it promotes stability for all involved in the market. If there indeed was mischief on the markets this is one way that it was possible.

Capital Gains Tax review for short term investments

The President also announced that capital gains tax on the sale of shares will be increased to 40% where those shares are held for less than 270 days (9 months). This is to curb speculative and short term investing behaviour on the ZSE. While the statement the President read states that CGT on shares is currently at 20% it is 2% (where shares are held for less than 6 months, else 1.5%) on listed securities. While we wait for the authorities to clarify we will assume the 20% was an errant referral to capital gains tax on immovable property. This deals a big blow to investors who have used the market for short term investing and those who simply wish to exit positions before 9 months. The statement isn’t clear on whether it is 40% of the profit or 40% of the proceeds as the current 2% works. Either way that is a huge chunk the government is taking. Again this looks more likely to follow the activity to increase tax revenue than punish any short term activity. With the ZSE returning 94% in April alone and 140% year to date while top performer Axia returned 163% in April and over 500% year to date (4 months) there is still room for profitability in short term trading on the stock market. There’s also a lot of money for the government. The ZSE gained approximately ZWL$1.7 trillion and 40% of that is ZWL$680 billion in tax revenue assuming all sales were of shares acquired within 270 days.

What’s next?

There is little doubt that some activity on the ZSE will be curtailed thanks to these measures. Other measures in the address are also likely to impact the activity but whether the impact will be significant in the long term remains to be seen. What recent history tells us is that the market will take some time to digest before resuming its normal path with much greater force. Change is however a constant, we simply don’t know the direction.