Shares in record territories as Zim dollar falls

By Lance Mambondiani

Great minds discuss ideas; Average minds discuss events; Small minds discuss people - Anon

OVERVIEW

THE current policy changes in Zimbabwe hardly constitute coherent economic policy. Although our economics have turned into that of ‘adaptation and survival’, dynamic inconsistency provides a theoretical basis for discussions on policy clarity and credibility.

Without a commitment to future policies, the incentive to speculate and deviate into an informal market is often cataclysmic. This lack of clarity itself is often the single largest contributor to black market transactions. The Minister of Public Service, Labour and Social Welfare announced that salaries have actually not been frozen.

The salary freeze directive implemented through Statutory Instrument 159A of 2007 is to be amended to allow increases through collective bargaining processes. The changes seem to be a pre-emptive reaction to strike threats by workers.

The Statutory Instrument however introduced a new potent threat, empowering the government to take over companies that reduce or stop producing owing to the current price controls. The recent directive comes soon after the debilitating price control directive, SI 142 (2007) which also suffered inevitable moderation and flip-flop due to its negative impact on the fiscus.

The month on month inflation figures in July 2007 dropped 31.8% in July and 11.8% in August. The annual rate of inflation dropped 1 042% from 7 634.8% to 6,592.8%. The reasons for the decline are obvious. The price controls introduced by government on the 25th of June created artificial ‘pull’ fundamentals.

The CSO would also have calculated the figures based on controlled prices even though the goods were available at a premium on the underground ‘black market’. The Zimbabwean financial market is incredibly resilient. In a normal market, so many changes in such a short time would cause volcanic tremors. Investors to their credit have turned immune to constant policy gyrations.

STOCK MARKET UPDATE

At current levels, the ZSE is powering to record territory outperforming galloping inflation on a trot. With the money market permanently subdued, the stock market remains the only source of a ‘fix’ for investment junkies. After cooling off mid last week as investors picked profits, the industrial index closed the week on Friday 14 September up 5.23% at 64,177,064.11 registering a 28% total week gain and cheered by news of an inflation decline.

The index never showed signs of easing off, opening this week 1,913,865.28 (2.98%) stronger at 66,090,929.39 points. By Tuesday 18 September, the main index was in record territory, rallying a significant 9.27 % to close at an all time high of 72,215,853.85 points. The rally was driven by significant gains in blue chip counters such as PPC, Old Mutual and Econet.

Tuesday’s gains were dwarfed by another impressive 12.20% climb on Wednesday to close at 81,029,500.60 points breaking records for the second day running. Old Mutual put on a significant Z$400000 to Z$1300000 a hefty 44.4% jump, PPC moved Z$200000 higher to close at Z$1700000, whilst Econet and INNSCOR jumped Z$20000 each to close at Z$450000 and Z$140000 respectively.

Based on the sustained blue-chip gains, it appears there is a correlation between the exchange rate movements and the current ZSE rally. Although correlation does not necessarily explain causality, it appears possible the index is responding to the fall of the Zim Dollar on the parallel market. Parallel market rates have moved 21.9% within the trading week. In the past two weeks, we have featured Old Mutual as a good hedge against currency fluctuations; a lot of our customers in the UK and in the USA who were pursued by this advice would have seen a perfect start to their portfolios.

TABLE 1: MOVERS & SHAKERS

Counter	Price	% Change	Counter	Price	% Change
Barclays	Z$35000	66.67	M&R	Z$16000	22.27
Cairns	Z$15000	66.67	AFDIS	Z$40000	22.27
Old Mutual	Z$1,3 million	62.50	Zimpapers	Z$1500	25.0
Starafricacorp	Z$20000	53.85	Redstar	Z$1200	20.0
CFI	Z$21000	50.0	Zimsun	Z$14900	19.46

Source: Coronation Advisory

STOCK MARKET OUTLOOK

Watching the ZSE is like being a security guard; swinging between boredom when nothing is happening to fear when all hell breaks loose and the adrenaline rush of buyer stampedes due to frequent policy shocks such as price controls. On the Zimbabwean market, the real risk is often much lower than perceived risk. Fundamentals favour a sustained rally punctuated by intermitted profit taking by investors previously locked in the market after the June ‘bears’.

FIGURE 1: BANKING SECTOR SHARE PERFOMANCE

Source: Coronation Advisory

Investors should however not be fooled into thinking the stock market can now guarantee returns. It cannot, there is no substitute for good market advice or portfolio management. Investors who pick up shares by the flick of a coin will suffer convulsions in a market correction. Buy orders should still be based on fundamentals and performance records than emotionalism and greed. To date, banking counters are leading the ZSE in terms of price performance.

Kingdom whose share price at Z$55000 now looks a bit pricy, remains the market leader having gained 122 120% since 1 January 2007. Barclays, now the biggest bank in terms of assets gained 89 644%. ZBFH has gained 46 054%. The worst share price performance is FBCH at 15 689%. There is still upside potential in CBZ, NMB and FBCH. CBZ with a much more solid balance sheet than its peers is trading at a huge cut-price, NMB even at Z$3000 is still cheap whilst FBCH produced a good set of half years establishing itself as a consistent performer.

For the bargain hunters, we recommend you try your hand at penny stocks. There are a lot of cheap penny stocks with good fundamentals, NICOZDIAMOND, Pelhams, Powerspeed, CELSYS, CFX and Zimpapers are examples. You can buy any of these shares with 1 Penny. At a price of Z$1500 a share for Zimpapers and assuming an OMIR (Parallel rate) of Z$690 000 to the pound, a penny is worth Z$6900. For 1 penny you can pick up 4 Zimpapers shares. The Zimpapers share price always surprises punters.

Every so often the counter registers healthy gains. Newspapers sell on bad news and the more policy flip-flops there are, the more Zimpapers will sell. Penny stocks though, require the patience of a tiger after a gazelle. You will need to be in the bush long enough for a pounce. With patience, chances you will prowl for a kill are good. The minimum amount required by stockbrokers to pick up shares will still apply. Looking ahead, despite recent gains, the market is expected to cool ahead of the Monetary Policy Statement by the RBZ. Investors will no doubt exercise caution but still pick up bargains on weakness.

INTERNATIONAL MARKETS

US Fed cuts interest rates to help faltering economy

The US Federal Reserve moved to rescue the faltering economy cutting interest rates by half a point from 5.25 per cent to 4.75 per cent sending the market into frenzy. The Dow Jones on Wednesday recorded its steepest one-day points gain for five years closing up 335.97, or 2.5 per cent, at 13,739.47. The broad based S&P index of US blue chips rose 2.8 per cent. This was an aggressive bailout of financial institutions previously engaged in irresponsible lending in the past couple of years fearing a serious economic slowdown. For the year, the Dow Jones has added nearly 11%, the S&P 500 is up about 7.6 % and NASDAQ 10%

In the UK, nervous investors regained some confidence after government assurances that it would guarantee Northern Rock deposits. UK financial stocks were also helped by the Bank of England’s 4,4 billion pounds into the overnight money market which had seized again on the news of the Northern Rock problems. Helped by the US stock rally, the FTSE 100 index gained 2.81 percent to close at 6,460.00.

Traders are on the hunt for the next victim anticipating a contagion effect in a clear indication the sub-prime catastrophe may yet claim high street banks as its next victim. The Bank of England governor on Wednesday injected a further GBP10 billion into the London money market in a bid to end the credit crisis. The governor was in the firing line on Thursday from MPs over his handling of the Northern Rock crisis. International market trends will remain correlated to the American sup-prime crisis and global risk perceptions.

EXCHANGE RATES

After firming 17.9 % last week at Z$640 000 to the Pound, the ZWD: GBP rate continued to traded higher on the parallel market closing the week between Z$680 000 to Z$690 000 or 7.3 % higher to the pound. Since the 2nd of August 2007, rates have plummeted approximately 98% on the back of increased demand and the devaluation announced in the Supplementary Budget.

FIGURE 2: OMIR 9/08/2007 TO 21/09/2007

Source: Crown exchange*

* Crown exchange is the treasury division of CFL specialising in exchange rate analysis and foreign currency structured transactions

The parallel market rates have also appreciated 13 900% since the beginning of the year. Applying a month on month average increase of 50%, since January 2007, forecasts suggest rates will close the year between Z$1,5 million and Z$1,7 million as individuals and companies try and escape inflation-induced losses. Although the governor’s Monetary Policy Statement is now imminent, for the first time in years, there is no fear of shock therapy from Samora Machel.

The MPS is largely expected to announce ZWD support structures which complement the devaluation. There is no indication traders are on the sidelines or in a state of paralysis as was the case with previous MPS. Is the Minister of Finance the new sheriff in town or will the governor flex his muscle and spring a surprise?