ZSE trades rumours during power cut

By Lance Mambondiani

“The problem with being in a Rat Race is that after the race, you will still be a rat” - Anon

OVERVIEW

FOR more than two days, the ZSE was plunged into darkness, unable to release statistics due to the blackout in parts of Harare’s CBD. A power cut on the NYSE will most certainly bring the exchange to a halt. On the 23rd of November 1990 an electrical failure at the NYSE halted trading for more than an hour. Previously the NYSE halted trading due to power interruptions on November 10, 1989, when a fire at a Con Ed facility halted trading for about an hour. The Zimbabwe Stock exchange with no power seems a perfect mirror for the rest of the Zimbabwean economy, an epitome of stubborn survivalism even when the poor is turned off.

Despite the power cuts, the market also endured a week of ‘careless whispers’. Investors were driven into frenzy when a statement from the Ministry of Industry and International Trade was interpreted to imply a crackdown on the ZSE. This was later denied by both the Ministry and the central bank governor. The Ministry of Finance is also reported to have met the ZSE regarding the possibility of increasing withholding tax, whilst ZIMRA is reconciling their books and following up any non-payment of VAT on shares, whose tax currently stands at 15 percent.

The 2008 Fiscal budget was due to be delivered on Thursday with the Monetary Policy Statement due thereafter. Such news, all within one week can be overwhelming. The renewed interest on the stock market by the authorities is not surprising. After failing to tame the tide of money moving into the exchange, the government will seek to benefit from it by increasing taxation on stock trading with obvious consequences to stock prices.

The 2008 Fiscal budget announced on Thursday was another attempt by the Ministry of Finance to ‘reheat the leftovers to make them look appetising’; it is perhaps a repeat performance of the same old tune. There was no significant investment in infrastructural development or policies likely to encourage economic regeneration. 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, creating a budget deficit. 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. With indications being that the government will continue to pursue a low interest rate policy to borrow cheap, it is unlikely that any amount of tinkering with numbers will cause the stock market to suffer a permanent state of paralysis.

STOCK MARKET UPDATE

For a long time to come, the stock market will remain the place to hide. When things go wrong, there are just not that many options. The renewed regulatory interest in the market will lead to some brief adjustment with the market trading in troughs perhaps for the rest of the year.

However, the maturity of the ZSE cannot be underestimated, it will rebound. In last week’s trade, once the ‘rumours of war’ had filtered into the market, stocks took it on the chin with all counters trading in the red in a profit taking driven frenzy. After the news had been dispelled, the market was on a rebound, with the industrial index reaching record levels at 667,682,215.00 an increase of 23.04 percent during the week under review with the mining index up 15.58 percent. The loss of power at the ZSE was no major catastrophe, although the exchange was unable to release indices for the beginning of the week, traders were upbeat although trading was mixed in anticipation of the National Budget.

In Tuesday’s trade, the biggest cheer was from Circle cement, which gained an impressive Z$2 million at Z$5 million. Circem now has the highest yield to date at 1 369 763 percent since January overtaking Kingdom which had outshined all other counters since the beginning of the year, now with a YTD of 888 788.9 percent. Another unsung hero, often ignored when the praise songs are written is the diversified conglomerate TA Holdings which has also overtaken Kingdom with a YTD of 941 076.5 percent. Not so long along, TA stock was a ‘fodder’ stock often considered a company with problems or a perennial underachiever by market analysts.

The Kingdom share price, up Z$10 000 mid-week to Z$400 000 seems to have reacted to the good news that the bank was granted a Malawi banking license through First Discount House where it had earlier increased its shareholding to 40,16 percent acquiring a portion of Press Corporation Limited’s 30 percent stake. The second largest shareholder in FDH is a trust controlled by the current head of company, Thomson Mpinganjira, TF Mpinganjira Trust with a 39.84 percent shareholding followed by Old Mutual at 20 percent.

Kingdom also runs a commercial bank in Botswana trading as Kingdom Bank Africa Limited which previously suffered teething problems due to capitalisation problems between 2005 and 2006. The bank’s original Pan-Africanist investment approach seems to be bearing fruit. Returns on the stock market will most certainly continue to outpace inflation many times over, at least until the end of the year. Separate analysis revealed that returns on the ZSE are almost 13 times the rate of inflation explaining why equities will remain in fashion for a time to come.

STOCK MARKET OUTLOOK

Whilst the economy continues to weaken and the bad news continues to pile, stock prices may inevitably fall. It is easy to get seriously confused in an equally confused market. Whilst trading in the market will continue to be cyclical, due to continued cycles of profit taking induced by regulatory and political uncertainties, new tax thresholds or simply because investors are booking profits for Christmas, now is not time to panic. Do not react to extremes in short term direction. Prepare to pick up shares when they bottom again in the next couple of weeks, they certainly will.

The fact is stock market prices already reflect the bad news we already know about. Prices hardly fall further on the basis of old information. Before the year is out, there will certainly be one last Santa Claus rally. If you are looking for a moment to sell prepare for the crest in the next couple of weeks. If you are looking to buy, wait until the fall.

Besides the 2008 Fiscal Budget, the most potent threat may also come in the governor’s monetary policy statement. However, although he may despise the stock market rally having gone on for this long, with the Governor striking a conciliatory note with business, it is unlikely that he will be the one to spoil the party. The introduction of a new currency will threaten the viability of currency dealers and is not likely to affect stock market traders.

Money for stock market transactions is often transferred through the formal RTGS system and not in cash. The stock market may actually see a short term surge due to the so called ‘cash barons’ attempting to put their money in the formal system and avoid threats of their money being frozen in Zero interest Anti-Money Laundering bonds for 5 years.

INTERNATIONAL MARKETS

International markets opened Monday in volatility as fear of a recession, credit worries and continuing problems in the financial sector reversed earlier cheers. Questions emerged about federal help for ailing mortgage-lender Countrywide Financial, leading to an acceleration of losses in late trading and leading bonds to rally. There was also profit taking from Friday, when stocks rallied in a shortened session as traders bet on upbeat holiday sales.

The Dow Jones Industrial Average (DJI) fell 237 points to 12,743, as 28 of its 30 components retreated. Financial stocks AIG, American Express, Citigroup Inc. (C) and JP Morgan Chase & Co. (JPM) weighed on the blue-chip index. Citigroup, along with HSBC, was again in the spotlight amid continuing problems tied to investments in subprime mortgages. The S&P 500 index (SPX) lost 33 points, or 2.3%, to 1,407, while the NASDAQ Composite (RIXF) fell 55 points, or 2.1%, to 2,541.

Trading volumes showed 1.5 billion shares exchanging hands on the New York Stock Exchange and 2.1 billion on the NASDAQ Stock market. Declining stocks topped gainers by 25 to 8 on the NYSE and by 3 to 1 on the NASDAQ in a general indication that the market is still in a struggle. In the United Kingdom, a consortium led by Sir Richard Branson’s Virgin Money was declared the preferred bidder in the battle to take over Northern Rock which fell victim to the subprime crunch.

FOREX MARKET

The governor of the central bank has since denied that the central bank was responsible for the cash shortages being experienced in Harare. In his statement issued on the 21st of November 2007, the governor commented that cash barons were keeping a bigger chunk of the Z$58 trillion currently in issue outside the banking system and warned that a new currency regime was imminent. We expect Sunrise 2 to be launched in the Governor’s MPS which is expected soon after the 2008 Fiscal budget.

Cash shortages have the impact of stalling exchange rates and paralysing the services of parallel market dealers of all kind. The exchange rates on the parallel market leveled last week due to the acute shortage of cash. The USD/GBP rate surged this week perhaps in renewed buying ahead of the budget and the launch of Sunrise 2. Traders were quoting rates of £1: Z$5,2million when this week opened on the 26th of November.

Going forward, rates are expected to continue sliding until the launch of the new currency. Last week we advised that the RBZ was likely to introduce bigger denominations of bearer cheques to ameliorate the challenges of a currency fast losing its local value due to high inflation. Indications are that the central bank will also slash between 1 to 4 zeros when the new currency is announced, with the likeliest probability being 3 zeros.

In the absence of a new economic regeneration project, it is unlikely and that the new strategy will be successful without simultaneously addressing at least some of the economic problems facing the nation.

CORONATION BOOK REVIEW

Two Worlds Apart: Daniel Manyika

A widow battles to keep her grandson in school. This is in a world where the odds are stacked against her. Running in parallel to this is the story of a single mother who is struggling to keep her son on the straight and narrow. It is an African story, steeped in intrigue and drama that has its twists and turns, revealing the clashes between urban and rural life as Tonderai fights to secure a decent future for himself and his grandmother.

"A witty and insightful look at rites of passage. This book will appeal to readers of a wide range of ages and cultures."
Professor Helen Goodluck: University of York

"Two Worlds Apart falls into the new genre of diasporan books. Here is a satire of Zimbabwe's life after independence. Chenjerai Hove can die in peace. His work on social criticism has new disciples. A must read!"
Professor Kenneth Mufuka: Book of the Century Award Winner, 2002

“This is great book that will make you nostalgic of growing up facing challenges in Zimbabwe. The characters could be that of any of us. It is funny, yet touching. The conclusion will leave you with a tear in your eyes. Good read!
Lance Mambondiani: PhD Candidate, University of Manchester

Available at www.amazon.com
Or email dtmanyika2001@yahoo.com

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Lance Mambondiani is a Financial Consultant at Coronation Financial, an International Financial Advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at coronation.uk@btinternet.com. Please contact us should you wish to subscribe to our mailing list. You can also contact the Coronation team on; Business lines +44 161 346 9559 or mobile +44 790 3293 227.
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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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