This Tiny Stock Market Is Up 800% This Year

If the Nasdaq's 40% uptick this year or the 190% surge in Nvidia has grabbed your attention, the Zimbabwe stock market might just blow you away: it’s up almost 800% this year.

Now, before you scramble for a way to invest, remember this crucial (but often overlooked) fact: there’s a lot more to investing in a foreign stock market than believing that prices are likely to go up or down. Currency swings and inflation also come into play – and they can have a bigger influence on your returns than the changes in stock prices.

Consider the Zimbabwean dollar (ZWD): it’s taken a nosedive this year, with the US dollar rising about 900% against it (meaning the Zimbabwean dollar lost about 90% of its value). So, even though your stocks, priced in ZWD, would have grown by 800% this year, you wouldn’t exactly be in the market for a new Bentley once you convert those returns to USD.

Put it this way: at the start of the year, your $1 bought you 10 ZWD. If you’d invested that in the country’s stock market, your investment would have done a high jump and soared 800%, giving 90 ZWD. But, thanks to that 90% currency depreciation, If you then converted your 90 ZWD back to USD, you’d end up with less than a single dollar.

Of course, you don’t need to convert those ZWD back to US dollars – or to any other currency. You could simply use them to buy things or reinvest in the domestic market. The issue is: prices in Zimbabwe have almost doubled this year. So, the real value (i.e. the purchasing power) of the returns from your investment is being significantly eroded. Even though you have more Zimbabwean dollars now, due to your stock market gains, each of those dollars buys much less than it did at the time you made the investment.

So if the Zimbabwean stock market is seemingly doing so well, it’s not so much because companies are knocking it out of the park, but rather because local investors are piling in, seeking to hedge the risk of their weakening currency and rising inflation. So don’t get me wrong, the market’s 800% rise is great for local investors – who can regain some purchasing power lost to currency depreciation and inflation – it’s just not as great as it looks for foreign ones.