Zambia's Central Bank Holds Interest Rates Amid Inflation Easing: A Strategic Opportunity for Equities and Bonds?

Zambia's Central Bank has maintained its benchmark interest rate at 14.5% for two consecutive meetings, a decision aimed at balancing inflation containment with economic recovery. While annual inflation remains elevated at 16.5% as of April 2025, the pace of price increases has slowed to a four-month low, signaling a potential inflection point for investors. With inflation projected to fall to 8% by year-end and the central bank forecasting a return to its 6%–8% target range by early 2027, the question arises: Is now the right time to invest in Zambian equities and local-currency bonds?

Equities: A Market on the Cusp of Growth

The Lusaka Securities Exchange (LuSE) has shown resilience amid macroeconomic volatility. By 2025, the market capitalization is projected to reach $5.05 billion, with a compound annual growth rate (CAGR) of 3.10% through 2026. This growth is driven by a surge in foreign investment, a maturing middle class, and a shift toward sustainable and ESG-aligned assets. Younger investors, in particular, are prioritizing companies that align with environmental and social governance (ESG) principles, pushing firms to adopt greener practices and transparent governance.

Key valuation metrics paint a mixed picture. For instance, Zambia Reinsurance PLC (ZMRE) trades at a P/E ratio of 4.1x, significantly below the LuSE market average of 7.7x, suggesting undervaluation. However, its dividend yield of 1.6% lags behind the 5% benchmark for high-yield stocks. Meanwhile, utilities and real estate sectors, such as Copperbelt Energy Corporation (CECZ) and Real Estate Investments Zambia (REIZ), trade at higher P/E ratios (17x and 3.2x, respectively), reflecting sector-specific optimism.

Investors should weigh the market's earnings growth—38% annually over the past three years—against its elevated P/E ratio. While the LuSE's current valuation suggests optimism, it also implies that investors are pricing in strong future performance. For those with a long-term horizon, equities in sectors like utilities and real estate, which have shown robust 7-day gains (e.g., REIZ's 12.5% rise), may offer compelling opportunities.

Local-Currency Bonds: High Yields Amid Reform-Driven Optimism

Zambia's local-currency bond market has emerged as a standout in Africa's fixed-income landscape. The 10-year government bond yield stands at 22.21% as of August 2025, a stark contrast to the 38% peak in 2020. This improvement is underpinned by a successful debt restructuring that extended maturities to 15 years and improved creditor confidence. Moody's upgraded Zambia's credit outlook to “positive” from “stable,” signaling potential for a rating upgrade.

The kwacha's 19% appreciation against the U.S. dollar in 2025 has further bolstered bond attractiveness, reducing currency risk for local investors. Additionally, Zambia's debt-to-GDP ratio is projected to fall to 100% by 2025 from 126% in 2023, a trend that supports fiscal credibility.

However, high yields come with risks. Zambia's Caa2 rating (eight levels below investment grade) means investors must tolerate elevated credit risk. The bid-ask spreads in the bond market are narrowing, indicating improved liquidity, but structural challenges—such as reliance on copper prices and external demand—remain. For institutional investors seeking diversification, Zambia's bonds offer a compelling risk-reward profile, particularly in a global environment where U.S. Treasuries and emerging market benchmarks are less attractive.

Strategic Considerations for Investors

1. Equities: Focus on Sectoral Diversification
2. Utilities and Real Estate: These sectors have demonstrated resilience and growth, supported by infrastructure development and urbanization.
3. ESG-Driven Stocks: Companies aligning with sustainable practices (e.g., renewable energy, green infrastructure) are likely to benefit from shifting investor preferences.

4. Dividend Yield Caution: While high-yield stocks exist, investors should verify sustainability. For example, ZMRE's 1.6% yield is low, but its strong net profit margin (15.53%) suggests potential for future payouts.

5. Bonds: Balance Yield and Credit Risk

6. Entry Points: With yields at 22.21%, Zambia's bonds offer a premium over regional peers. However, investors should monitor inflation trends and the central bank's August 13, 2025, policy decision.
7. Currency Exposure: The kwacha's strength reduces hedging costs, but further appreciation could impact export-driven sectors.

8. Credit Outlook: Moody's positive outlook suggests a potential upgrade, which could drive yields lower. Investors should assess whether current yields compensate for this risk.

9. Macro-Level Timing

10. The central bank's rate hold indicates a pause in tightening, but inflation expectations remain a wildcard. If inflation falls faster than projected, the central bank may ease policy, boosting equities and bonds. Conversely, a relapse in inflation could trigger rate hikes, pressuring both asset classes.

Conclusion: A Calculated Bet on Zambia's Resilience

Zambia's equities and local-currency bonds present a unique confluence of high yields, structural reforms, and improving macroeconomic fundamentals. For equities, the key lies in selecting undervalued sectors with strong earnings growth. For bonds, the challenge is balancing attractive yields with credit risk. Investors with a medium-term horizon and a tolerance for volatility may find Zambia's markets compelling, particularly as the country navigates its path toward inflation normalization and fiscal stability.

As the Central Bank of Zambia prepares its next policy decision in August, the coming months will be critical in determining whether this is the inflection point for a sustained recovery—or a temporary reprieve in a volatile landscape. For now, the data suggests that patience and diversification will be rewarded.