Will the market catch a cold if Gono sneezes?

By Lance Mambondiani

PROCRASTINATION is the thief time. There will always be reasons to wait. The truth is, there are only two things in life, reasons and results, and reasons simply don’t count - Robert Antony.

OVERVIEW

The Governor of the Reserve Bank of Zimbabwe Dr Gideon Gono is to present his Monetary Policy Statement (MPS) on Monday 1 October 2007.

Historically the governor’s statements have reflected enormous economic authority for a central bank chief in any country. Government officials have often pointed out that Zimbabwe’s economic problems need an unorthodox approach to exorcise the recurrent economic problems.

Expectations on the MPS have always been unreasonably high. However, the governor has been a successful crusader for improving corporate governance in financial institutions, strengthening official supervision and improving market discipline.

Increasing the central bank’s discretionary powers has created its own moral hazards. Theoretically this has only worked in countries with a strong rule of law and where supervisors are held accountable for their actions. The RBZ’s previous boundless authority on its own has failed to address the country’s economic regression. Redemption may yet lie in the social contract, an initiative previously mooted by the central bank itself.

Should investors expect major policy changes on Monday? Often addicted to shock therapy policy measures, the central bank has the capacity to reduce the market into a state of perpetual paralysis in a single afternoon. Although the state of the economy demands this possibility, the latest policy changes from central government which the governor didn’t seem to support, such as price controls and the crackdown on businesses points to a different strategy.

More than likely, the MPS will complement rather than conflict with the fiscal policy. Regardless, it is unrealistic to expect that the governor will not tinker with the numbers or introduce at least one policy likely to change the course of business.

He may introduce a new currency, new denominations to the bearer notes or cut more zeros in an attempt to address inflationary pressures. With the supplementary budget now dismissed as inflationary, the market will be looking to Gono for direction.

Whatever the outcome, analysts already sensing blood, will most likely dismiss the MPS the following morning solely on the grounds that our human instincts predict the impossibility of a turn-around when fundamentals point towards economic decay.

STOCK MARKET UPDATE

The main industrial index closed last week on a spiral shedding off 1.99% to close at 79,561.155.90 points on Friday 21 September owing to widespread losses across the board. The bourse again traded softer earlier this week shedding 3.69% on Monday and 0.90% on Tuesday before a strong rebound on Wednesday, trading 10.20% up to close at a record high of 83,679,100.22.

For the third week running, the market was spurred by Old Mutual up Z$300000 to close at Z$1300000. The share price continues to respond to the depreciation of the Z$ on the parallel market. Econet surged Z$80000 to close at Z$550000 after releasing its results.

Econet Wireless, the largest cellular company in Zimbabwe by subscriber base, posted a 33 218% growth in EPS in the six months to 31 August 2007 with a 7 689% growth in revenue reflecting a constricted operating environment. Net earnings jumped 719% to Z$1,9 trillion from Z$232 billion the previous year. The cash rich company had a huge exposure in an equities portfolio.

The mining index was on the rampage, soaring 38.88% on Wednesday to close at an all time high of 77,238,766.43 surging closer towards the main index in what could be a historical index convergence. The surge was fanned by 57.14% gains in RioZim, with Falgold and Wankie advancing 42.86% each. Coronation advisors have been recommending mining counters to our customer for the past three weeks. Carefully selected counters can still offer decent returns.

FIGURE 1: ZSE INDUSTRIAL INDEX TO 26 SEPT 2007

Source: Coronation Advisory

The mining index rally was triggered by the devaluation in the supplementary budget, firming global metal prices on the back of a falling US dollar and the expectation that the RBZ Governor will review gold support prices to miners in the pending Mid-term MPS. Significantly, the stock market often paralysed ahead of previous MPS is not showing signs of steaming off. From our Penny stock recommendations last week, Celsys was up 57% on the back of a take-over deal, Zimpapers and NicozDiamond were all in the money. Investors are advised to exercise caution.

STOCK MARKET OUTLOOK

Market direction will be determined by the governor’s MPS on Monday. Although the governor is not expected to change the central government’s current policy direction, he will, no doubt announce monetary measures to escalate his long war on inflation and possibly parallel market activities.

The ZSE’s sustained growth of over 15 000% this year, now marching towards the 100 million point mark is not that difficult to understand. The vortex of the growth is corporate cannibalism, with companies hedging themselves against inflation by actively trading revenue in stock market portfolios at the expense of capital investments.

On the back of corporate money, the stock market as predicted, has outperformed inflation at 6 592% at the end of August. On this basis, we recommend clients to continue looking for opportunities on the ZSE. Individual investors will be hedged by corporate investors buying into each other desperate to report a profit to their shareholders.

For long-term investors we recommend our mutual friend Old Mutual, Econet, PPC, and ABCH they never let you down. There is still good value in CFX, Zimpapers and Star Africa. Although the market may come off on Monday, paying a minute of silence to the governor, there is every indication the year-end rally may have commenced. Investors will only have a short window to buy shares ahead of the holiday season.

COMPANY NEWS

NMB Chief Executive Retires – Dr David Hatendi, the CEO of NMB has announced his retirement from the besieged bank. He took over from Dr Julius Makoni in 2004 when the founding directors fled the country fearing prosecution for externalization charges.

Ironically, Dr Hatendi leaves the bank the same way he came, with the bank embroiled in a foreign currency scandal and with confidence in the institution at its lowest. NMBZ remains under investigation from the RBZ and the police for a US$4,6 billion fraud in the treasury department. Regrettably this blot happened under his watch punctuating an otherwise distinguished career.

The share price reacting to the loss of the career banker, retreated from Z$3 000 to Z$2800 at the close of last week before adding 16.7% on Thursday. The NMB share price has recently been responding to news that the regional giant ABCH is seeking to inject US$7 million in the bank in return for equity.

Celsys – The founder and largest shareholder in Celsys Gary Shayne is said to have agreed to dispose of his shareholding in the company to Lonrho. Shayne has a 70% controlling stake through direct and indirect shareholding. Lonrho on the prowl for cheap assets on the local market announced in July 2007 that it had raised 32,3 million pounds through LonZim in the UK targeting investments in Zimbabwe.

The Celsys share price, which we recommended last week as a strong buy was up 57% after the announcement on Wednesday rallying 27.3% on Thursday. At the current price of Z$700 per share, Celsys is still a buy on the basis that it is cheap and Lonrho will bring in the foreign currency required for the company’s expansion.

INTERNATIONAL MARKETS

The Commons Treasury Select Committee grilled BoE Governor Mervyn King over his handling of the Northern Rock crisis last week. The governor defended the BoE’s actions saying the current legislation ultimately tied his hands on his ability to handle the situation.

The Governor mentioned that he would have preferred it to be a ‘covert’ lender of last resort (LOLR) but current takeover laws prevented such a situation. Fears that the entire British Banking system was at risk induced policymakers to promise to provide tens of billions of pounds in three months loans.

On Wednesday 26 September, banking stocks enjoyed a rebound buoyed by renewed hope for a bid for Northern Rock, lifting market sentiment. The FTSE 100 Index closed 36.1 points up at 6433 driven by a firm set of GDP figures pointing to a healthy UK economy allaying any banking crisis.

EXCHANGE RATES

Since the 2nd of August 2007, the Zimbabwe dollar has plummeted approximately 98% on the black-market. The ZWD: GBP rate closed last week trading higher on the parallel market closing the week between Z$680 000 to Z$690 000 up 7.81 % to the pound.

By Monday the 24th of September, the ZWD struggled to find a bottom, plunging 31.16% in a single day to open the week at Z$905 000 against the pound. The rate plunge was triggered by a saturation of buy orders from companies struggling to finance critical imports. Currency movements have also been linked to ‘price control’ induced commodity shortages which have forced families to import goods from regional markets increasing the demand for ‘hard currency’.

FIGURE 2: PARALLEL MARKET RATES

Source: Coronation Advisory

Economists have warned that the impact of price controls is reduced productivity resulting in commodity shortages. The open secret is that although the de jure classification or the publicly stated commitment of the central bank remains at Z$30,000, the de facto or observed parallel behaviour of the exchange rate at Z$905 000 is trading 3016.6% higher than the official rate.

By the close of this week, GBP rates were close to breaching the Z$1 million dollar mark. Since it is unlikely that the MPS will again devalue the Zim dollar next week, the currency will face renewed attacks with expectations that it may close the year beyond the Z$2 million mark to the GBP unless the MPS introduces radical curtailments.

Coronation Financial Plc will have open investor meetings in Coventry and London between the 29th and the 30th of September 2007, to register your participation and for full details, email or phone Coronation on the details below.