Bull run on the ZSE: heads you win, tails you win

• Financial Market Report (September 7-13 2007)

• Financial Market Report (August 30-06 September 2007)

• Financial Market Report (August 23-29 2007)

• Financial Market Report (August 16-22 2007)

• Financial Market Report (August 9-15 2007)

• Financial Market Report (August 2-8 2007)

• Financial Market Report (July 26 -August 1)

• Financial Market Report (19 July - 25 July 2007)

• Financial Market Report (29 June - 6 July 2007)

By Lance Mambondiani

ALL men dream, but not equally. Those who dream by night in the dusty recesses of their minds wake up in the day to find that it was vanity; but the dreamers of the day are dangerous men, for they may act their dream with open eyes to make it possible – T.E. Lawrence

OVERVIEW

Financial markets, previously in a form of paralysis, were relieved to see the back of the Supplementary budget presented by the Minister of Finance last Thursday. Significantly, the budget indicated that the country’s domestic debt has soared to Z$8,1 trillion largely due to high interest payments, which at 6.1 trillion accounted for 75,4% of total debt.

Of the proposed Z$37.1 trillion, Z$25.5 trillion is recurrent expenditure whilst Z$11.6 trillion is capital expenditure. Whilst there is no significant investment in infrastructure or policies likely to encourage economic regeneration, it appears clear as professed by one Minister that the country is living from hand to mouth.

The government is clearly spending more than it’s making, which in elementary economics is the breeding ground for inflation. The budget deficit implies a relationship between a ratio of the government’s current liabilities with future values of inflation, interest rates, GDP and money growth. Whichever way you look at it, inflation forecasts cannot be pretty

Regardless, the state’s paternalistic price control and wage freeze policies signifies a return to the socialist politics of the 1980s, when Zimbabwe’s government sought to achieve growth with equity to address unacceptable inequalities inherited from the colonial past.

Perhaps, the government once scarred by Neo-liberal, Washington Consensus type structural adjustment programmes now knows better and is slowly transforming itself into an entrepreneurial state. Even with gritted teeth, every stakeholder will be hoping the state’s economic experiments will crank up the rattling motor to start. The Chinese believe ‘it is better to light up one small candle than to curse the darkness’ – perhaps we ought to believe the same and hope for the best.

STOCK MARKET UPDATE

Many analysts are often riveted to the tasteless fascination of predicting that a market crash is imminent. In truth, the market knows no colour, dispensation or political sentimentalism. Diamonds often crystallize under cratonic high pressure. The market will inevitably succumb to a domino crush, but fundamentals tell us that time is far away.

In this trading week, a record seventy-five counters gained significantly with no losers. It was a case of heads you win, tails you win. Diaspora investors often worried about matching their returns to US$ or GBP have also been smiling this week. Using basic calculations, an investor who would have invested GBP1, 000 to buy Pioneer at last week’s price of Z$500 a share would have bought approximately 1,050,000 shares with Z$525 million, applying last week’s OMIR or parallel rate of Z$525 000 to the Pound. At a closing price of Z$3 000, the value of the shares this week would have been Z$3 150 000 000 representing a 500 % change.

The exchange rate moved this week by 17.9% to close at Z$640 000 to the pound. Discount the profit by 17.9 %, the investor would still have pocketed approximately Z$2 billion in currency adjusted profit or GBP3, 125 less brokerage commissions. Any good fund manager would have recommended at least one of the top five counters as a serious buy. ‘Show me the money? It’s right there before our eyes’

TABLE 1: MOVERS & SHAKERS

MOVERS			SHAKERS
Counter	12/09/07	% Change	Counter	12/09/07	% Change
OK Zimbabwe	Z$7 000	536.36
Pioneer	Z$3 000	500
Steelnet	Z$2 800	211.11
NMBZ	Z$3 000	200.00
Zimpapers	Z$2 000	185.71

Source: Coronation Advisory

There is no denying that the market is now officially in a bull run which started before the announcement of the Supplementary budget. After cautionary trade on Thursday last week, closing 0.79 % weaker at 44,490,653.35, the market rallied to close the week on Friday 7 September, 12.29% higher at 49,957,688.11 points spurred by Old Mutual which romped Z$136000 to Z$751000 trading Z$28 billion in value terms. PPC was up Z$100000 to Z$1000000, Meikles up Z$80 000 to Z$300000. To the ordinary eye, the gains seemed the work of fiction.

FIGURE 1: ZSE INDUSTRIAL INDEX 9-12 SEPTEMBER 2007

Source: Coronation Advisory

Sustained gains on Monday saw the index surging 14.89 % and 18.67 % on Tuesday to close at a record braking 68 108 881.90 points beckoning towards a stampede of optimism. The index cooled off on Wednesday shedding off 3.10 % as investors started profit taking and revaluing their portfolio ahead of the Governor’s Monetary Policy Statement excepted sometime next week. After the supplementary budget, the industrial index experienced a 47.17 % growth whilst the mining index shocked many, putting on 92.22% to its weight.

The mining index often overlooked is doing even better than the main index, soaring 25. 65 % on Friday, 22.58 % on Monday and 20.35 % higher on Tuesday 11 September. The stock market rally reflects budgetary deficiencies. Timid investors, for long on the sidelines, realized that the budget was inflationary. With the government bleeding due to interest charges, the interest rate regime is unlikely to change for the foreseeable future, favouring equities. Fundamentally, the equities market will continue to experience a rally due to some or all of the following reasons;

• The Z$37.1 trillion to be introduced in the market will lead to excess liquidity in the money market and in turn low interest rates.

• The government will favour a low interest rate regime on the money market to reduce or sustain its current exposure.

• The devaluation of the ZWD will benefit export oriented counters - Since the RBZ’s Monetary Policy Statement in April, exporters have been surrendering 40% of their receipts at the Drought Mitigation Exchange Rate of Z$15 000. They will now be surrendering this at the new uniform rate of Z$30 000.

• Lack of alternative investment instruments which are likely to outperform inflation in the medium term

STOCK MARKET OUTLOOK

Why do investors act so irrationally sometimes? Of course in an efficient market all investors would act rationally and consider all available information when deciding on their investment choices. The Week on Week analysis shows that that the weaknesses were a clear premonition for a rally, not looking back since the 28th of August 2007 when the rally started.

FIGURE 2: ZSE INDEX WEEK ON WEEK

Source: Coronation Advisory

The ZSE is however not the best example of an efficient market. However, excessive caution and risk aversion can often result in investors missing out on potentially profitable opportunities. Whilst some fear can be productive, in the world of investment, excessive risk aversion is often counterproductive and needs to be eradicated. The best way of doing this is to get good investment advice.

Coronation has for the past 4 weeks advised investors to cherry pick bargain counters and anticipate a market rebound. Many of our investors who heeded this advice have made buckets of money in real terms. When the average investor realizes that the market has risen, they pour cash into stocks trying to capture some of the profit on the crest. In most cases, their returns will be marginal because the market will be reaching its peak, the average investor panics and sells near the bottom.

All too often, this pattern continues, causing the average investor to lose much of his or her capital and become disillusioned with stocks. Whilst bulls may continue to rampage, the risk to investors is picking up counters which have peaked, based on frenzy and euphoria and in the process catching the falling swords. Investors are also encouraged to exercise caution ahead of the Monetary Policy Statement.

Buy Recommendations - Export counters will be the direct beneficiaries of the devaluation of the Zimbabwe Dollar. All mining counters will continue to adjust upwards in the short-term reacting to this rare dose of good news. The good thing with the mining index is that it is often overlooked by casual investors who, because of ‘herd behaviour’ stampede on the main index. Investors may want to look at counters such as RioZim, Ariston, Cottco, Tanganda, Interfresh and Bindura. Investor watch list should also include HWANGE, HIPPO and FALCON.

COMPANY NEWS

CBZ/ABSA Deal – South Africa’s biggest retail bank Absa secured regulatory approvals to sell its 24.1 %minority stake in Zimbabwe’s CBZ Holdings. Absa’s majority shares are held by Britain’s Barclays Plc. CBZ bought the 164 830 123 shares at a special bargain price of Z$464, for Z$76.4 billion. Due to CBZ’s aggressive growth strategy, Absa has tried and failed to increase its shareholding in the bank.

In truth, CBZ now the second largest bank in terms of assets in Zimbabwe, after Barclays no longer needs the cushion of a foreign shareholder. This would have been important if the bank was pursuing a regional strategy, there is no indication this is on the cards at the moment. For Absa, a shareholding in CBZ became duplicitous with its interests in Barclays Zimbabwe. The divorce suited both parties.

EXCHANGE RATES

In the Supplementary budget, the Minister of Finance devalued the official exchange rate from US$1:ZW$250 to US$1:ZW$30,000 abolishing the RBZ’s two tier Exchange Rate system. Since 26 April 2007, exporters and holders of foreign currency accounts were allowed to transact using a Drought Mitigation and Economic Stabilisation Fund Rate of US$1:15 000. The Minister also seems to have signified a power shift by adding a comment that adjustment of exchange rates in terms of the Reserve Bank Act, Chapter 22:15 was a function of the Ministry and not the RBZ.

The devaluation however remains a fraction of the parallel market rates. The ZWD: GBP rate traded higher this week closing the week at ZW640 000, a 17.9 % change from last week’s rate Rates appear to have been adjusting to the devaluation news.

Going forward, exchange rates may hold steady or move marginally as companies maintain new found optimism at accessing currency at the new rates. The RBZ has also realized a total of US$134 million from the tobacco-selling season, which closed on Tuesday 11 September 2007. A total of 70 million kilograms was sold at an average price of US$2.34. This may lead to reduced demand for foreign currency.