CORONATION WEEKLY INVESTMENT HIGHLIGHTS
By Lance Mambondiani
Overview
The Zimbabwean financial market is not for the fainthearted, it has often been said if you can do business in Zimbabwe, you can do business anywhere in the world. Frequent policy shifts render business forecasting useless. Recently, the central bank chief liberalized the foreign currency market and left analysts wandering if this was for real, and if it was, what the catch was? In the same week, ZEC announced that the Presidential run-off might be delayed by almost a year due to logistical problems. The long drawn political drama has resulted in further paralysis to a market already in a comatose state.
Last week saw the resurfacing of the cash crisis, with long queues forming at banks and delays of up to a week in the processing of RTGS payments. There are numerous explanations for the cash crisis, from the bank conspiracy theory to the monetary policy mismanagement theory. In basic terms, the persistent cash crisis reflects the problem with a hyperinflationary environment; economic agents demand more money for transactionary purposes in a hyperinflationary environment.
With most of the commodities available on the black market, consumers would prefer to keep their money out of the banking system in case they find scarce commodities where they need to pay for them in cash. With reports suggesting that 90 percent of all economic activity is now in the black market, it’s not difficult to see how this can be the case. The other explanation for the cash crisis is a general loss of confidence in the financial sector; negative real interest rates have meant that investors have no incentive to put their money in the formal banking sector, as there are no viable investment options.
On this occasion, the cash problem was ignited by the introduction of higher denominated bearer cheques and the liberalization of the foreign currency market which resulted in some people converting their hard currency for Z$ without banking the proceeds. This appears to have exposed thin liquidity positions in a number of banks resulting in banks ‘juggling’ and delaying RTGS payments to cover overnight positions and avoid approaching the RBZ for accommodation. In light of all these multi-dimensional causes, the prescription to the cash problems is to restore macroeconomic stability and addressing price disequilibrium in the market.
Is the outlook brighter?
The general expectation of change in the political climate has brought with it renewed interest in the Zimbabwean financial markets. Chaotic markets as is the current state are the most difficult to invest in, yet the most profitable. This is because investors recognize that prices are trading higher in spite of weak fundamentals and they are often tempted to stay out of the market until there is a correction.
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Despite the chaos, investors with a long-term view on Zimbabwe will recognize that the time to take positions in the market is now.
Stock Market Update
The stock market rally came to an abrupt end last week as profit takers claimed previous gains. Most counters traded mixed. In the week to Wednesday last week, sixty-two counters traded in the positive whilst only eight closed in the negative territory. By Friday, the 9th of May, the industrial index was down 2.62 percent to close at 107,606,254,002.58 points whilst the mining index was also down 2.27 percent to close at 100,670,379,609.68 points. The movers were led by Ariston, which rose 175 percent to Z$11 million, followed by Boarder up 158 percent to Z$310 million. Hwange and CAFCA gained 117 percent and 110 percent to close at Z$260 million and Z$105 million respectively.
With the market in a pendulum, the Top 5 counters by capitalization are not a surprise. KMAL is at the top of the list at $169,611,087,800 reflecting its critical mass after the four-way merger earlier in the year.
TOP 5 COUNTERS BY CAPITALIZATION
| Counter |
Mrkt Cap ($m) |
YTD (Percentage) |
| KMAL |
169,611,087,800 |
8,135.3 |
| Delta |
146,651,862,00 |
6,900.0 |
| Econet |
109,335,313,500 |
8,650.0 |
| Cottco |
106,258,841,280 |
6,650.0 |
| Innscor |
87,829,242,600 |
5,056.3 |
The top 5 counters by YTD are largely mid-cap counters playing catch up with the rest of the market, with Boarder, Radar and Seedco topping the charts since January 2008.
TOP 5 COUNTERS BY YEILD
| Counter |
Mrkt Cap ($m) |
YTD (Percentage) |
| Boarder |
12,882,748,500 |
85,614.3 |
| Radar |
5,264,808,990 |
31,566.7 |
| Seedco |
38,120,633,000 |
24,900.0 |
| Ariston |
6,545,283,930 |
17,547.1 |
| TSL |
10,234,014,330 |
13,536.4 |
Going forward, the increase in money supply due to the extension of the central bank’s quasi-fiscal instruments and the introduction of new ones such as SPPMF and AMP in July 2008 will result in a bloated money market. The extended election period will also result in increased concessionary funding which will contribute to surplus conditions in the money market, favouring equities. Although equities are expected to continue as the investment option of choice, recent reports of escalating violence in the aftermath of the election may yet see investors fleeing from the market in preference for informal markets. Quite clearly, the stock market has continued with its bullish trend despite dire economic forecasts amidst a ‘crisis’, it may take an earthquake to slow down the Bull Run.
Suggested Stock Picks
Delta, Barclays, KMAL, Old Mutual and Innscor which can be valued easily in US dollars remain our top picks. Speculative stock picks include Powerspeed, Dawn, Radar and Celsys and anything that appears undervalued compared to the rest of the market. For investors not already in the market seeking to maximize on an upside, the current profit taking cycle may present a perfect buying opportunity. The future will belong to those who identify and invest in premium assets now ahead of a turnaround, regardless of when that turnaround may come.
The Forex Market
The Zimbabwean dollar opened the week trading at £1:ZWD430 million for UK money transfers as MTAs tried to keep up with the interbank exchange rate in Zimbabwe which is trading at US$1:ZWD220. The interbank rate has been as volatile as the parallel market since the floatation of the currency by the central bank last week. The increase in rates may be a result of banks chasing rates on the black market as traders holding the scarce commodity call the shots on rates.
The floatation of the exchange was certainly a bold decision by the central bank, considering that a number of finance ministers lost their jobs for suggesting the same policy. In the short-term, the floatation will result in an improvement in foreign currency inflows through the official channel, a stabilization of rates and a return of the foreign currency business to treasury departments in banks. It is also expected that rates will continue to edge upwards as traders try to out compete each other.
Conclusion
It seems unlikely that the MPS will result in the stabilization of the macroeconomic policies besides attracting foreign currency in the formal market. Expanded concessionary funding and the increase in money supply will still cause the acceleration of inflation. With the election process in limbo, it is unlikely that the government will adopt long-term economic policies to address the disequilibrium caused by price controls or reduce concessionary spending.
Lance Mambondiani is an Investment Executive at Coronation Financial Plc, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at coronation.uk@btinternet.com Please contact us should you wish to subscribe to our mailing list. You can also contact the Coronation team on; Business lines +44 161 346 9559 or mobile +44 790 3293 227.