Old Mutual trades at a premium on ZSE, return of the implied rate?

HARARE,– The recent surge in the share price of the multiple-listed Old Mutual on the Zimbabwe Stock Exchange (ZSE), where it is now trading at a 32 percent price premium, could possibly point to how the market could price a soon-to-be introduced local currency in Zimbabwe.

Old Mutual has a primary listing on the London Stock Exchange (LSE) and secondary listings in South Africa (on the Johannesburg Securities Exchange – JSE), Malawi Stock Exchange (MSE), Namibian Stock Exchange (NSX) and Zimbabwe.

In Zimbabwe, the stock enjoys fungibility status, which allows the trade of shares on the Zimbabwe register in the other markets. In June, the Reserve Bank of Zimbabwe increased the fungibility limit of Old Mutual shares from 40 percent to 49 percent.

At the height of Zimbabwe’s hyperinflation, which ended in 2009 when the country dollarised, the bulk of transactions between the fast-devaluing Zimbabwe dollar and other currencies, primarily the US dollar, were calculated using an Old Mutual Implied Rate.This market-driven rate used the price of the Old Mutual share on the LSE against the corresponding price on the ZSE.

Amid Zimbabwe’s worsening banknote shortage, the US dollar itself has two different values — physical dollars are trading at as much as a 20 percent premium on electronic transfers.

Zimbabwe says it will introduce a ‘surrogate currency’ — bond notes it says are backed by a $200 million AfreximBank facility — in a bid to promote imports and ease dollar shortages largely blamed on a gaping trade gap and the smuggling of US dollar notes from the country.

The bond notes will trade at par with the US dollar, the central bank has said, although analysts are skeptical that the local currency will hold its value against pressure from an economy that’s short on confidence and hugely dependent on imports.

The impending introduction of the local currency has brought memories of the recent past, when the central bank kept the printing press running to fund a government deficit, in the process leading to the first, and to date only, episode of hyperinflation in the 21st century.

Old Mutual closed at 322.32 cents on the ZSE on Monday, while trading at 245.77 cents and 245.86 cents on the LSE and JSE, respectively, during the day.

This discrepancy of a cross listed share gives room for the simultaneous buying and selling of the shares, in different markets in order to take advantage of differing prices for the same share. For instance on Friday one would buy the Old Mutual share from the LSE and sell it 32.82 percent higher on the ZSE and likewise one would buy it on the JSE and sell it 30.35 percent higher at the ZSE, hence the arbitrage opportunity.

In the past 3 months, Old Mutual (ZSE) started to trade above other Old Mutual shares listed on the LSE and JSE starting from 14 September (according to the prevailing exchange rate) when it traded at 270 cents relative to 231.42 cents on LSE and 266.86 cents on JSE. Going forward it continued to trade higher on ZSE relative to other exchanges, especially in the month of October as depicted on the chart.

Some analysts have, however, cautioned against reading too much into a correlation between the Old Mutual price rally and the imminent currency move.

They attribute the higher price to the current bullish performance of the ZSE, saying there is high demand for Old Mutual’s quality shares against low supply, which, based on market fundamentals, would lead to a higher price.
This is also because the company’s financial performance is impressive relative to other counters that are listed on the local bourse.

Further, higher transaction costs on the ZSE, compared to the other exchanges, could also account for the price premium, the analysts say.


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