Could Zimbabwe’s ‘basket-case’ stock market rally 250%?

Zimbabwe’s stock market could easily double by the end of this year. And if you have the taste for adventurous investing in search of higher returns, there are a few easy ways for UK investors to play this turnaround…

To start with there is LonZim (LON:LZM), an investment company listed on the Alternative Investment Market (AIM) that invests in and manages businesses in Zimbabwe. It got in at the height of Zimbabwe’s crisis, snapping-up assets on the cheap. And it says that it will announce a few huge deals in the coming weeks. That’s one that’s worth looking at more closely.

Then there’s the Anglo-South African insurance and asset management company, Old Mutual (LON:OML). It is a FTSE 100 company, with its main listings here in London and in South Africa. But its shares also trade on the Harare Stock Exchange in Zimbabwe.

Of course, most investors probably still won’t go anywhere near Zimbabwe. And that’s why you could benefit even more! In fact, let me just show you how big an opportunity this could be…

How Zimbabwe went from breadbasket to basket-case

Over the last decade Robert Mugabe’s “land reforms” made a complete hash of one of the world’s most promising emerging economies. The country went from being the bread basket of Southern Africa to a complete basket case. Zimbabwe became one of those places where no matter how bad things were, you could almost be sure that they would soon get worse…

Inflation in the country is now running at 89.7 sextillion percent. That is 89.7 million million million, or 89,700,000,000,000,000,000,000 (that’s twenty zeroes!)

Putting that into perspective, there are about 70 sextillion stars in the known universe apparently…

Things got absolutely nutty. The exchange rate plunged so badly that one U.S. dollar fetched 12.6 trillion Zim dollars. The economy ground to a halt. And the share market plunged by 86% in the two months to November.

Businesses and investors got their teeth kicked in. You would have to have been very stupid or very savvy to want to invest there.

Then in November, things hit rock bottom for investors. The Central Bank Governor, Gideon Gono, shut down the stock exchange. He accused some traders of using fraudulent cheques worth “60 sextillion” Zimbabwe dollars to buy shares

The Zimbabwean economy is set to turn around

But the situation in Zimbabwe looks set to improve very quickly now. Morgan Tsvangirai’s opposition MDC party won parliamentary elections last year. And after months of wrangling, a functioning coalition government was sworn in last week. That might finally put an end to the bitter political feuding that has paralysed the country… and finally turn things around for investors.

Crucially, the finance ministry in the new government has gone to the reformist MDC party. And they are already working to kick start the country’s economy.

They re-opened the Harare Stock Exchange. And they have slashed the stamp duty on share trades from 2% to 0.5% to boost trading. They have also scrapped the 5% withholding tax on share sales. And most importantly shares on the exchange are now going to trade in US dollars. International investors aren’t going to have to worry about figuring out how many zeroes there are in a hexillion…

Why would you want to invest in Zimbabwe? Because there are huge profit opportunities there.

The country has the world’s second-biggest platinum reserves after South Africa. It was a massive agricultural exporter as well. Most importantly, it has one of the most highly-skilled workforces on the African continent. This country has everything that it needs to profit from rising demand for commodities.

This market is dirt cheap right now. Companies on Zimbabwe’s exchange now trade at just a third of what they would fetch if they were broken up and sold off. But it probably won’t stay that way much longer.

Zimbabwe could be the world’s top performer this year

Zimbabwe’s stock market will probably fall over the short-term. Investors who have been locked-in for the last three months may rush for the door. But adventurous investors are already lining up to get back in. New money entering share markets could deliver triple-digit gains to bold investors by the end of the year.

Renaissance Capital, one of the top emerging markets merchant banks has come up with a prediction that the market could soar by 250%.

I’d normally ignore the hype from brokers. But Renaissance has been operating on the ground in Zimbabwe during the crisis. So they have a much better picture of what is actually going in the markets than the talking heads in the City. Renaissance Capital are also the chaps who set up the first merchant bank in Russia after the fall of communism. They ended up making a mint while most investors were too afraid to buy in.

Zimbabwe isn’t about to go from hell on earth to a land of milk and honey just because they now have a coalition government in place. But the worst is probably over in the country and Zimbabwe looks like it is at the turnaround point. This basket case could turn out to be the biggest winner of 2009.

By Manraaj Singh, Chief Emerging Markets Strategist for the Profit Hunter investment service.