Zimbabwe: Weekly Financial Market Report

Bears steal the Market

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

By Willing Zvirevo

“When buying shares, ask yourself, would you buy the whole company?” – Rene Rivkin.

OVERVIEW

In real terms, the ZSE is the best performing stock exchange in the world. The Zimbabwe Industrial Index up some 7399% since the January 2007 and 12 000% over twelve months is three times in excess of the increases in consumer prices.

FIGURE 1: ZSE INDUSTRIAL INDEX 2005-2007

The reason why we continue to recommend investments on the ZSE is because the market is reflective of the deteriorating economic conditions in Harare. Increasingly, the only means for the government to fund itself has been money-supply growth. The stock market is the primary beneficiary of the fresh money. Fresh money enters the economy first through banks and other financial entities who may invest it in shares, or lend it to others who buy shares.

The relative stock market outperformance relative to general prices of other goods such as food or clothes will continue as long as this monetary process is allowed to continue. Regardless of the temporary crash, by the end of this year, the ZSE is on course again to being the best performing stock exchange in the world as long as the government continues with its affinity to print money.

ZSE UPDATE

The selling mood triggered by Government’s directive to manufacturers, wholesalers and retailers to slash prices by 50% continued throughout the week to Friday, 13 July 2007. The industrial index fell by 17.3% to close the week at 31 649 696.25 points, whilst the mining index retreated by a marginal 1.9% to close at 16 418 575.22. Last Friday was particularly not a good trading day, as the market fell to a 23 day low on the back of increased selling pressure.

The current price war has seen most businesses booking losses and others recording squeezed gross margins of below 10%, compared to monthly inflation which is the region of 50%. Businesses are therefore faced with reduced revenues without a corresponding reduction in cost structures. The prevailing low sentiment on the stock market has seen some investors parking their wealth in physical assets and foreign currency while they assess the situation regarding the future direction of the market.

However, investors can capitalize by buying on current weaknesses and wait for a rebound. Investors must ‘buy when pessimism is at its maximum and sell when optimism is at its maximum’. The best time to buy stocks is when most investors are selling, which is now.

TABLE 1: MOVERS AND SHAKERS

BIGGEST MOVERS

BIGGEST SHAKERS

DOWN

Counter

06/07/07
(Z$)

13/07/07
(Z$)

% (+)

Counter

06/06/07
(Z$)

13/07/07
(Z$)

%
(-)

Celsys

250

350

17000

7000

Hunyani

8000

11000

PGI

4200

1900

CBZ

13000

17000

Celsys

30000

14000

Falgold

12000

15000

Bindura

25000

14000

Afdis

30000

35000

Truworths

3500

2000

A few counters closed in positive territory on Monday, 16 July 2007. Zimsun, followed by NTS, Pelhams, PPC and ZBFH, led the counters that gained on Monday.

STOCK MARKET OUTLOOK

Whilst the market could continue losing ground, as uncertainty continues, there appears to be a conciliatory tone coming from the Government concerning prices and this could return some of the lost confidence in the business sector based on the unsustainability of the crackdown and the impending hardships it will cause the ordinary man on the street. Any positive remedial measures are likely to benefit the stock market. Investors should note that a monetary policy review is expected before the end of the month.

The June results reporting season is also upon us and that is expected to spur activity on the market, albeit impressive historical performance may not be enough to resuscitate some stocks given the events post period end, particularly the price freeze. We therefore believe investors can take advantage of the current weaknesses to accumulate stocks that are backed by good fundamentals or have property as a key part of their investments. Such stocks include FBCH, Dawn Properties, Steelnet, Barclays, Zimsun and Old Mutual.

MONEY MARKET

Having closed the week to 13 July 2007 in positive territory, the money market closed the day on Monday, 16 July 2007 on a sizzling deficit of Z$1.2 trillion, which was largely attributed to huge cash withdrawals and statutory reserve payments. The short conditions were also a factor of cash withdrawals by the public seeking bargain goods. However, the deficit is expected to be temporary, lasting up to 14 days on the maximum.

In response to the deficit situation, rates may continue to firm in the next week or two as banks scramble for deposits to square their positions in a dry market. For the timid investors the money market may provide a temporary investment destination whilst they assess the situation on the stock market. Whilst money market investments generally give low returns in relation to inflation, there are some attractions, which the money market offers which include the liquidity of investments, guaranteed returns and easy exit.

EXCHANGE RATES

The parallel market rates are firming after hitting lows of Z$130 000 to the USD some two weeks ago. Indications are that the ZWD: USD rate is hovering somewhere between Z$195 000 and Z$200 000 and Z$330 000 to the Pound. It appears there is now increasing demand for foreign currency from fuel dealers and the generality of the population.

The recent increases in daily withdrawal limits by the Central Bank has provided the much needed liquidity which is now driving parallel market activities. Fuel dealers, who had briefly stopped importation of fuel following the Government directive for them to slash the pump price of fuel to levels below cost, have now restrategised and are back on the buy side of the market.

Although international suppliers drive parallel market rates, the current mayhem in the economy, the price controls and the restrictions on imports will continue to temporarily reduce the demand for forex for the next couple of weeks. However, the prices will continue to firm as businesses adjust to the current policies as they have done in the past 10 years

To discuss any investment options in Zimbabwe or for feedback contact Coronation Financial Holdings.