Johannesburg - After shunning Zimbabwe during its years of hyperinflation and political strife, foreign investors are finding the southern African country increasingly attractive.
The main index, up more than 25% this year, hit a record high of 191.16 on Friday and offshore investors have been strong buyers.
Zimbabwe's adoption of the dollar, a new constitution that curbs presidential powers after 33 years of President Robert Mugabe's rule, and cheap valuations are luring some foreign investors to its stock market.
But nagging concerns about elections due this year and the government's policy of forcing firms to cede majority stakes to black citizens are deterring larger portfolio inflows and the foreign direct investment that Zimbabwe needs, investors say.
"Zimbabwe used to be the breadbasket of Africa so the potential to restore its lost glory is still there," said Funmi Akinluyi, Silk Invest's sub-Saharan Africa investment director, adding that the firm has no investments in Zimbabwe but is looking at it closely.
"It just needs fundamental changes, starting with politics."
Zimbabweans in March approved a new constitution limiting presidential powers, removing the main barrier to an election in the second half of this year after a disputed 2008 poll.
Those investing in Zimbabwe, including Renaissance Asset Managers, Investec and Stanlib, say they are cautious but believe it has already seen the bottom.
They also say companies are cheap compared to regional peers, while tough conditions have produced strong managers.
"The management is brilliant," said Sven Richter of Renaissance, citing one firm that adopts two business plans each year for high and low inflation. "When the environment is particularly harsh you find the best management teams come to the fore."
Mobile phone operator Econet is trading at a forward price to earnings ratio of about 6 times, a steal compared with 16 times for its Kenyan peer Safaricom or about 13 times for South Africa's Vodacom.
Thabo Ncalo, who co-manages Stanlib's Africa equity funds, with around $200m in assets under management, is avoiding mining and banking stocks because of the risks of the local ownership drive and an increase in minimum capital requirements for lenders. The funds' exposure to Zimbabwe is some 12 percent.
Ncalo favours consumer names such as Econet, fast food group Innscor Africa and Delta Corporation, Zimbabwe's largest brewer.
They are among the top traders by value on the Zimbabwe Stock Exchange, with a market capitalisation is $4.9bn.
In the first three months of 2013, foreigners were net buyers of $11m worth of shares a month on average, more than double the monthly average in 2012, according to data from the Zimbabwe Stock Exchange.
But some investors are waiting until after the elections, hoping for more clarity on the new government's policies.
"If this is a real turning point for the economy then we're going to want to be invested for years, not months," said Andrew Brudenell, manager of HSBC's $250m frontier equity strategy, which invests in Nigeria and Kenya.