How this election could affect ZSE

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Enacy Mapakame
Zimbabweans choose a new President this July, and the inherent volatility of financial markets means uncertainty always increases up until, at least, the election outcome.

But the correlation does not always work like clockwork; it is more like the effects of the moon on tides.

Some market watchers expect the local stock market to continue with its current rally ahead of the July poll, amid a surge in confidence over the country’s political and economic future.

Others are rather cautious on the correlation.

“The upcoming election season has become the new “BIG IF” for investors in the Zimbabwean economy. The interim government is seeking to impress the electorate by implementing economic reforms that are likely to bear fruit.

“Our view is that the outcome of the election is likely to have minimal negative impact on the economy as all players within the political divide are geared up for economic reforms,” say analysts from Akribos Research Services.

This impact of national elections on markets is a phenomenon that is not unique to Zimbabwe.

Globally, elections have shown to have an impact on the performance of stocks. According to a Nasdaq report, markets respond better to elections whose outcomes are more predictable, as opposed to uncertainty.

The report further says the stock market’s reaction to a new president is mostly dependent on the economic situation that the incoming president inherits.

However, volatility also seem to develop in the first year following an election as the market and investors digest the change and gradually increase to its peak in the second year of the cycle.

This is the time that the market tends to generate minimal returns, yet prior election, it can move sideways reflective of the greater future uncertainty by investors.

During the last harmonised elections of 2013, stocks rose sharply pre-election.

Then mainstream Industrials Index reached a record 231 level around end of July that year. And then there was a blood bath soon after the election, which resulted in the Industrials Index hitting below the 100 re-base level.

This year, stocks are already trending higher ahead of elections with the Industrials Index at 343 level. There is a couple of reasons for this. One, expectations of improved economic performance, which leads to stronger company earnings.

Two, improved political environment and confidence in the ability of the current administration, mainly from foreign investors as well as by those at home.

Analysts contend the market could be primed for a significant rally with total market capitalisation expected to be in the 11 digit range.

Already, there is positive impetus following the change in the country’s leadership after military intervention last November, although the economic conditions that prevailed last year such as foreign currency and cash shortages still persist.

The current administration has relatively stabilised economic environment, building confidence among foreign investors who have promised to pour in $11 billion in foreign direct investment. The positive reception President Emmerson Mnangagwa is getting from previously hostile governments is also indicative of the positive sentiment that is expected to drive stocks.

President Mnangagwa has also made it clear that Zimbabwe was open for business and promised to tackle the problems that had been left unattended by the previous administration, in a move aimed at attracting investment.

Equities analysts say the economic pressures that drove the market rally last year are still apparent, among them ballooning bank balances, foreign currency and cash shortages as well as multiple pricing in the economy.

This comes on the back of currency disparities albeit a thriving black market.

Additionally, the new Government’s thrust on economic growth has further increased positive investor sentiment, which analysts say will continue post-election.

However, investors will continue to cherry-pick as they look for companies that have a strong capital base and sustainable business models.

These will mainly drive the stock market, while focus on revival of agriculture, which is the mainstay of the economy, is expected to continue post election and further drive growth, which will cascade to other sectors.

Analysts also maintain that one of the best ways to mitigate against market volatility in election cycles is to focus on macro-economic trends, keeping long-term perspective which will help reduce risks to investor portfolios.

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