Investing in Zimbabwe: do we really have a choice?

By Lance Mambondiani

'Do not wait to strike when the iron is hot; but make the iron hot by striking it' – William B Sprague

OVERVIEW

COMMON investment strategies suggest that in a hyperinflationary environment, investors hedge against negative real returns by seeking refuge in non-interest bearing assets such as equities, the property market and the currency market.

Zimbabwe’s remittance statistics in a study by Bracking and Sachikonye (2006) established that approximately 85 percent of remittances by Zimbabweans in the diaspora is sent to support families, 4 percent to buy properties, 3 percent to invest in businesses and 2 percent to support friends.

The statistics reveal the dilemma or self-limitations of investors in the diaspora considered privileged with disposal incomes which those in Zimbabwe lack, due to deteriorating economic conditions.

Very low on investment and very high on subsistence, less than 10 percent prioritise investments in a business or in buying properties. The reasons often cited for the failure to invest is the unstable political and economic climate itself an oxymoron.

FIGURE 1: DIASPORA REMITTANCES

Source: Coronation Advisory

Unlike foreign investors, many in the diaspora with no luxury of choice have a chicken and egg dilemma. Should you invest now or wait until economic fundamentals have restored?

I have often asked most of my cynical clients, assuming economics or politics were to change overnight, would that really change your personal circumstances? It is unlikely this would be the case. There is no replacement for investing regularly and the power of compounding and systematic investment in personal wealth accumulation.

The Sachikonye research confirms what we already know, many in the diaspora who invest consider buying properties on the top of the list. Recent reports suggest that high and middle density properties have gone up approximately 42 000 percent since January 2007 due to increased demand.

Whilst returns on properties are far exceeding the inflation rate at 6 592.8 percent, few in Zimbabwe consider buying a property as an investment than securing a family home. Many who buy more than two properties would want to invest in something else but have no adequate information on what else to invest in.

When markets engage in a rip-roaring bull market, there is nothing that matches the excitement and the sheer speed with which investors can make money on the stock market. Whilst property prices often move in a group, if the stock market index were to double this would be the average of a vast spectrum of movements with many shares rising far more than 100 percent, spreading the returns across many counters.

The ZSE’s sustained growth of over 15 000 percent this year reflects average broad gains in numerous counters with Kingdom at 266 567 percent, Falgold at 178 471 percent to counters such as Truworths with returns at 3 900 percent. For all the talk on recent promulgation of empowerment laws, Zimbabweans in the diaspora or at home need to improve their investment patterns, sending money home to look after families maybe a sunken necessity, smarter options are to seek investment opportunities which allow the distribution of a reasonable return to your family. After all we don’t live forever. For many of us seeking to return or to stay in Zimbabwe, we don’t have a choice; we have to invest regardless of circumstances. We can only engage in the reckless habit of ignoring investing for the future at our own peril.

STOCK MARKET UPDATE

Analysts have observed that investors are driven by emotions, often oscillating between greed and fear. The inevitable process of action and reaction results in booms and monumental hangovers. Timing the market reflects how greedy an investor is. How do you know when to sell especially when things look so good? How do you hold when dollar signs are reflecting in your eyelids? When is the best time to buy?

Markets will always fluctuate, they will give you butterflies. Profit taking at the close of last week saw the market plummeting 10.84 percent last Thursday closing weaker at 127,525,184.08 points owing to widespread loses. The mining index was no better, shedding off 18.37 percent to close at 152,206,650.77 points. Timid doomsday preachers had already claimed the bursting of the bubble was nigh. Alas, the slump was only due to profit taking, which we warned last week.

At the close of the week, the market only recovered a marginal 1.27 percent before pushing back through the roof on Monday 8 October, opening this week 10.39 percent stronger to close at 142,569,727.09 aided by Econet, PPC and Old Mutual. These three counters have been ‘the axis of good’ having been at the core of any rally this year, pulling the rest of the market up by the scruff of the collar at times. We recommend the counters to form the nucleus of any portfolio construction for investors.

Any speculative portfolio should be bridged and averaged with that core nucleus of such defensive stocks. Tuesday saw widespread gains across 45 counters with only 6 in the red; the main index was up 8.85 percent at 155,185,449.06 whilst the mining index closed 5.73 percent higher at an all time high of 186,610,246.20 points. On Wednesday 10 October, the index again firmed 6.4 percent to close at 165,095,106.50 points whilst the mining index traded 1.1 percent higher at 188,672,881.80 points.

TABLE 1: EQUITY MARKET INDICATORS

Indices	Week Ending 1st Oct 2007	Week ending 10 Oct 2007	Percent Change
Industrial	94,702,041.39	165,095,106.60	74.33
Mining	123,013,608.00	188,672,881.80	53.37
Average p/e
Industrial	232.16	191.91	-17.34
Mining	100.00	100.00	0.00

Source: Coronation Advisory

Between October 1 and October 10, 2007, the industrial index has appreciated 74.33 percent whilst the mining index appreciated 53.37 percent. In the past week, sixty-eight counters gained with thirty-one of them gaining by more than 50 percent, whilst nine gained by more than 100 percent. This appreciation has caused the significant swelling of shareholder returns. Will the bulls on the stock market continue to rampage? Barring a sudden change in interest rate policy, Investors on the ZSE look certain to have a dream finale to the end of the year complete with bulging pockets.

STOCK MARKET OUTLOOK

So what does the Bull Run mean to you, seeing the stock market continues to brim with optimism, money continues to pour into the market like never before? Although analysts are quick to proclaim a bull run, a genuine bull run is said to require at least 20-25 per cent of the counters to be on the increase for a sustained period of time. A bull run can still cause a lot of stress for investors. Many will be banging their heads on the table asking themselves why they didn’t sell earlier. The answer is simple –greed. It may be time for investors to sell some of their stocks and book profits. Some stocks may generally become overpriced. An overpriced stock in a heated market will surely adjust when the bull run comes to and end.

A popular strategy we recommend is to sell some of the shares and buy back the stock when the price falls back to reasonable levels. Avoid investing in overpriced stocks and exit immediately if you feel the price has gone up sufficiently. Lastly, investors must remember there are no permanent bull runs or bear markets, something has got to give, when it does, you must be caught on the right side.

Traditionally, the main industrial index has always traded ahead of the mining index. The industrial index at 165,095,106.50 points is trailing the mining index, which closed Wednesday at 188,672,881.80 points representing a 14.28 percent difference. Psychologically, we expect the main index to close this gap. In the short to medium term therefore, the indexes will feed on each other based on catch-up fundamentals providing steam and momentum for bull run to continue.

Coronation Top Picks Defensive Picks
FML Old Mutual
CFX PPC
NMB Econet
Celsys
Interfresh

The direction of the ZSE at least for now cannot difficult to predict. The MPS loaded with budgetary handouts to almost every ministry has been criticized by economists as expansionary. There were more quasi-fiscal distributions than there were macro-economic inducements.

The central bank will distribute money to manufactures of basic commodities and farmers. The Treasury bill rate maintained at 340% per annum against inflation of 6 450 percent will continue to create a negative real investment rate. Besides the negative interest rates, the high fiscal deficits which have absorbed disproportionately high levels of domestic savings have limited the contribution of monetary policy to economic growth and development. All these factors will intensify capital flight to non-interest earning assets particularly the stock market, the property market and the currency market.

COMPANY NEWS

Secondary SMEs Bourse Planned - The Ministry of Small to Medium Enterprises is making preparations for the establishment of a secondary Stock Exchange for small businesses. Among the global exchanges, London Stock Exchange’s Alternative Investment Market (AIM) is the most successful platform for small issues and has attracted a large number of companies globally

Since its launch in 1995, over 2,500 companies have listed on AIM, raising more than 34 billion Pounds through Initial Public Offerings (IPOs) and further capital raisings. Based on empirical studies carried out in early 2000, Zimbabwe has one of the largest SMEs sector in Africa. The supply driven expansion of the SMEs sector could be a reflection of the failure of the economic fundamentals and rising unemployment in the formal sector estimated at 80 percent.

With the SMEs sector now larger than mainstream businesses, analysts predict that more than 500 SMEs will look at raising capital from outside sources such as the capital market. Small mining companies in need of extensive capital outlays will particularly benefit. Structured properly, the SMEs bourse will give small and medium enterprises a starting point for growth, with a good track record of 3-5 years on the SMEs Exchange the companies can then apply to the main exchange for listing.

Premier Problems – Details have started to emerge on allegations of improprieties at Premier Finance Group (PFG), the holding company for Premier Banking Corporation. The founder and CEO, Exodus Makumbe, tendered his resignation on August 29 with reports suggesting he was to focus on the group’s international expansion.

Reports published in the Independent now suggest that the board under pressure from the RBZ may have squeezed the executive out amidst allegations of insider loans. The Chief Operating Officer, Cassius Gambinga is also implicated in the allegations. It is also believed the RBZ has issued Premier with a corrective order following forensic audits at the bank.

In his Monetary Policy Statement, the Governor in reference to the problems at Premier noted the re-emergence of incestuous relationships between banking institutions and their holding companies. It was also announced that three banking institutions had been directed, in terms of the Banking Act to relieve culpable executives of their posts. If Premier was the first, which were the other two institutions, was NMB caught in the net again?

FOREX MARKET

Exchange rates on the parallel market slid further, losing 23.81 percent to close the week around Z$1,300,000 to the Pound Sterling. Parallel market dealers were buying the South African Rand at Z$85 000, up from Z70 000, the Botswana Pula was fetching Z$95 000 whilst the US$ was trading between Z$600 000 to Z$650 000.

The reasons for the decline remain the same old story, perennial buying pressure from principal companies to fund critical supplies such as fuel, grain and fertilizer. The Grain Marketing Board and the RBZ are in the process of importing 30 000t of wheat from neighbouring countries. Without balance of payment support, the payment for the wheat will be on a cash basis which is likely to put further pressure on the dollar.

In the MPS, the RBZ announced an unusual centralized Management of Corporate Foreign Currency Accounts to avoid foreign currency leakages. All corporate Foreign Currency Accounts and NGO Foreign Currency Accounts balances as at the 1st of October 2007 are to be remitted and lodged with the RBZ. The deposits will earn an inclusive interest rate of 12% per annum in foreign currency whether the currency is US$, Pound, Euro, Pula or Rand.

FIGURE 2: PARALLEL MARKET RATES

Source: Coronation Advisory

The 12 percent interest rate is a very competitive rate for investors without an option. Whilst the downside is that the investors will have to liquidate their FCA holding at the prevailing official rate of Z$30 000 to the USD. As a net importer of commodities, the renewed slide of the dollar on the parallel market will command an upward adjustment of prices. With the government having recently introduced price controls, the price increases in commodities such as fuel looks inevitable. This in turn will put pressure on the prices of other commodities.

Coronation Money – Weekly Tip

Invest in value for the long-term - Warren Buffet is rated as the world’s third richest man, with an estimated fortune of over $52bn. Unlike other billionaires on the Forbes list, Warren Buffet did not invent anything or establish a retail business, he made his money in shares.

He identified companies he believed were worth more than their market value, invested in them and holding the investment for the long term. It paid off. Econet shares were underpriced for a long time after the company listed on the ZSE. It was however clearly a value counter, investors who held on to their shares benefited from the inevitable correction. Identify under valued counters, pick up shares and write them off, they may be your pension for the future.

Lance Mambondiani is a Director of Coronation Financial Holdings, a financial advisory company registered in the UK. He can be contacted at coronation.uk@btinternet.com or on +44 790 329 3227
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The foregoing has been prepared solely for information purposes only based on independent research by Coronation, no representation or warranty; express or implied is made to its accuracy or completeness. Coronation therefore accepts no liability for any loss arising, whether direct or indirect, caused by the use of any part of the information provided. To discuss any of these investment options in detail please contact Coronation Financial Plc. Reg No. 06342947.

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