Linda Tsarwe Business Correspondent
There has long been talk about the introduction of a second stock market for relatively smaller and growing companies. This is in addition to other calls for the establishment of alternative markets such as fixed income markets. It was therefore not surprising when last week, the Zimbabwe Stock Exchange (ZSE), advised of the proposal to establish an alternative market to be named the Zimbabwe Emerging Enterprise Market (ZEEM).

The first draft proposal of the listing requirements of this market was issued and a public notice followed thereafter, whereby the ZSE is seeking public opinion over the contents of the listing requirements.

The establishment of ZEEM comes at a time when the economy is facing challenges such as the acute shortages of liquidity. Given such a background, there is doubt on whether or not the market will have a greater life span, if at all it manages to kick off.

Although the idea is noble, there are currently many risks which pose as threats to the success of this market, primarily because of its economic timing.
According to the notice to the public, the ZSE indicated that the establishment of ZEEM, which is still subject to regulatory approval, is stemming from the need to increase the overall market’s product range.

The market will accommodate smaller companies that have growth potential but do not yet qualify to list on the main board.
Due to the size of the companies to list on ZEEM, the listing requirements are less stringent compared those of the main board. No counters from the mainstream market will be transferred into ZEEM. However, if a company listed on the main board wishes to list on ZEEM, it would need to delist first from main ZSE market and apply for listing on ZEEM thereafter. Hence, the ZEEM is a market for “new” listings only.

The ZSE further indicated that the establishment of ZEEM was in line with regional and international practices ,where alternative markets are developed to nurture small companies while at the same time broadening investment options for investors. It is also said to complement Government’s policy as per the economic blueprint, ZIM-ASSET.

Stock market performances have a strong positive correlation with the performance of the economy. One good example happened a fortnight ago when the overseas market took a huge tumble after the World Bank downgraded its growth forecast for the global economy. Hence, although in theory a second market comes with its own benefits, the economic environment determines the survival and subsequent relevance of such a market. In Zimbabwe, since dollarisation, the economy has suffered from shortages of liquidity.

Over the past year, the shortages have worsened, as witnessed by the decline in business activity and consumption levels.
In addition, activity on the ZSE mainstream market has been depressed with relatively lower turnovers.
Foreigners have been the dominant investors on the ZSE accounting for 65 percent of bought turnover over the period January to September 2014.

History has shown that foreign investors favour the blue chip companies, and therefore, most of the foreign money has found its way into counters such as Delta, Econet and Innscor.
If that is anything to go by, then ZEEM is most likely going to be immaterial as far as turnover is concerned. Foreign investors are not expected to suddenly shift their appetite to smaller companies because a separate market has been created for such companies. Their risk profile is still deemed as high, and new listings of unfamiliar companies will be viewed with more skepticism.

Local investors are the main buyers into smaller cap counters and interestingly, local bought turnovers was US$126 million for the nine months to September 2014, averaging only US$14 million a month. Dissecting this amount between the small counters on the main board and counters on ZEEM makes it irrational to have a standalone market that turns over such amounts.

Ironically, there has been a rise in the number of companies that are opting to delist from the main board. Some have taken this route mainly due to under-performance and felt that there was need to work on their company problems off the public scene.

However, some solid companies are currently in the process of exiting the ZSE and going private. These companies have managed to court investors that have the financial muscle to capitalise their businesses.

ABC Holdings and Astra Holdings are examples of such companies.
Some listed companies have argued that they are not getting much value from being listed. The market has not been able to attract significant capital and therefore has failed to play its key role of raising capital for its listed patrons. This does not set a good precedence for would-be public companies. Smaller unlisted companies might not find any motivation to list on ZEEM, despite incentives such as less stringent listing requirements.

In addition, the will to list by some smaller companies might be lacking. Almost every player in business is faced with a shrinking market and has a mammoth task to, at best, defend revenue levels.

Market giants are failing to hold their own in the harsh environment and it can only be expected that the smaller companies are having an even bigger challenge to survive. Therefore, most of the smaller companies will rather limit their worries to keeping their businesses afloat, without having to voluntarily bring in the hassles of listing their business on an exchange.

Although growth might be desired, the current environment has put most businesses on a defensive mode rather than browsing the ideas of expansion or going public.
However, it cannot be ruled out that creating a market for smaller companies is common practice in both developed and developing countries.
In Africa, countries such South Africa and Kenya have segregated their markets mainly on the basis of market capitalisation.

For example, the JSE Top 40 constitutes 40 biggest companies on the JSE out of over 400 companies listed on the exchange. This index, however, constitutes about 80 percent of the total market capitalisation of the market.

Likewise, in Kenya, the Nairobi Securities Exchange (NSE) runs an NSE 20-Share Index, which is a price weighted index and constitutes top 20 blue chip companies with strong fundamentals and those that have consistently returned positive financial results. Investors with different investment styles are therefore given more product options to choose from.
For example, a large cap fund which is passively managed in South Africa can have an indexed portfolio of the JSE top 40. In Kenya, a fund manager that is investing only in growth stocks will find interest in tracking the NSE 20-Share Index.

Hence in Zimbabwe, the same options can be made available by the creation of ZEEM. Since ZEEM is focusing on smaller companies that have potential for growth, investors with a relatively higher risk appetite and are looking for high yields would be participants on this market while those looking for solid and stable companies would put their money in companies such as Delta on the main ZSE market.

In turn, smaller companies are given a platform to nurture their business into becoming solid big companies in future. Industries such as telecommunication and mining have a number of small companies with a potential to grow if given the right guidance and resources.

The development is good for them as well as the economy. Of course, there might be need to re-look at our main board, as currently some counters listed on that bourse are definite candidates for ZEEM.

ZSE administrators might need to clean up the mainstream index so that the differentiation between the main board and the smaller market is clear. Counters such as ZECO and General Beltings that slumber throughout the year, might as well delist and pursue listing on ZEEM.
Notwithstanding these benefits, the market cannot ignore the distresses of the economy.

It is acknowledged that creation of smaller markets or sub-indices has been beneficial in improving investment offering to investors.
Simultaneously, smaller companies have had the privilege of listing with other smaller peers and given a fair comparison rather than being thrown in the deep end with bigger players.
However, the Zimbabwean economic environment is waning. Liquidity filtering into the main market is meagre and hence making the market inefficient.

There is huge doubt on whether the new market will be able to attract any significant capital given its risk profile as well as the shortages of liquidity. Although the idea is noble, its economic timing might play against its success.

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