Equities rally after ‘People’s Quadrillion Budget’

By Lance Mambondiani

‘A man’s treatment of his money is the most decisive test of his character. How he makes it and how he spends it’ – James Moffat.

OVERVIEW

WHAT is it about the Zimbabwe stock market these days? Every time politicians make statements about policy directions, the stock market has occasionally rallied, trading on a trot and at a tangent to the rest of the economy. Remember how price controls ignited the current Bull Run with investors fleeing productive investments to seek investments in equities?

On November 29, 2007, Finance Minister Dr Samuel Mumbengegwi presented the 2008 national budget dubbed ‘the people’s budget’. Earlier reports suggest that the quadrillion budget would break international records all for the wrong reasons.

Zimbabwe is apparently the only country in the world with a budget whose figures are approaching the infinite, apparently confusing the Minister in making sense of the numerous figures. If the quadrillion figures confuse an erudite doctor of philosophy, an eminent minister of finance, I feel sorry for my aunt in Sakubva and even my former teacher, Mrs. Ncube who still teaches form 4B Mathematics in Zhombe.

For the benefit of ‘the people’ for whom the budget is intended, quadrillion is actually a real number, coming after trillion, representing ‘a thousand trillion or 15 zeros. As far as our research shows, only Zimbabwe uses this currency range, first used to calculate the market capitalisation of the Zimbabwe Stock market back in August 2007. The quad currency range is a mathematical nightmare to ‘the people’, incomprehensible to the ordinary man. Most calculators do not have the capacity to accommodate fifteen zeros.

The Minister’s budget was for Z$7,9 quadrillion against bids of $42,4 quadrillion by ministries and departments. Forecast budget deficit is approximately 11 percent of expected GDP of $16 quadrillion. Capital expenditure is to account for 32 percent of total expenditure. The capital expenditure is to cover capacity utilisation, support to agricultural sector, roads and bridges, social infrastructure, irrigation capacity deployment, water and sanitation and small and medium enterprises. It is for this reason that the budget predictably focuses on social and more than likely patronage agricultural funding ahead of the 2008 elections.

The difference between ministry submissions and allocations gives an indication of the direction of inflation in 2008. 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 the inflation forecasts of 1 900 percent for December 2008 will be met. The budget also projected an economic growth of 4.0 percent next year. The growth is projected on the optimism of a good agricultural season and the capital expenditure directed into that sector.

There are however few current examples of economic regeneration driven by the agricultural ahead of the productive sector. Any drive towards increasing agricultural productivity, whilst a popular policy for ‘the people’ in the farming communities or rural areas, will need to be matched with an equal focus on industries and the return to business productivity.

STOCK MARKET UPDATE

After the budget has come and gone, it appears the stock market will still remain the place to hide for investors seeking a hedge from the market confusion. Indications are that the government will continue to pursue a low interest rate policy. As a result, the money market will remain in the negative territory due to the inflationary pressures. Although there may be shortages in Zimbabwe, the ZSE is never short of action.

After mixed trading last week due to budgetary anticipation and rumours that the Ministry of Finance met the ZSE regarding the possibility of increasing withholding tax and news that ZIMRA is reconciling their books and following up any non-payment of VAT on shares, the market opened the week on a rally, picking up momentum from the 2008 budget announcement.

By Friday, November 30, the industrial index had gained 65.04 percent to close the week at 1,101,952,387.82 points as most counters were on a rally. By Tuesday, December 4, the market was back in record-breaking territory with the industrial index up 6.77 percent to close at 1,220,385,086.53 points. The mining index was up 1.38 percent to 1,425,371,705.82 points.

The main index YTD reached 214,054.24 percent with a weighted P/E ratio of 17 087.8. The mining index YTD was also up 348,143.47 percent with an average weighted P/E ratio of 2 819.7. The market rallied the entire week again firming 3.0 percent on Thursday to close at 1 359 044 777.88 points. It appears the market is set to close the year on an all time high, rewarding marathon investors who have stuck it out since the beginning of the year. Without the jargon, the market is still in a Bull Run state.

Although a number of counters remain undervalued, this may not be the best time to top up your investment. We still expect that the market will dip on the basis of profit taking soon, maybe before Christmas. That market dip will present the perfect bargain opportunity to buyers

In the interim, however, we still see value in FBCH, CFX (which is considered a dog by many brokers), FML and Meikles. Investors are still advised to exercise extreme caution when buying shares. Remember in the past couple of weeks Kingdom and Meikles were in our top five picks despite the reservations of many analysts. Both counters have not disappointed with Kingdom now trading beyond the Z$1,000,000.00 mark.

STOCK MARKET OUTLOOK

So how will the 2008 Budget affect the stock market going forward? The current bullish trend on the stock market is most certain to continue. Last week we predicted a Santa Claus stock market rally leading to the festive season. The outlook on the money market remains moribund. The Z$7 840 trillion expenditure budget against revenues of Z$6 080 trillion represents a budget deficit of Z$1 760 trillion which is likely to be financed by the RBZ issuing low yielding treasury bills resulting in negative returns for money market investments.

In short, investment options will continue to be in non-interest bearing instructions with the stock market topping our list. It all seems quite a simple deductive approach, but the business of predicting markets is not an exact science. Analysts often try to work with what they have and of course it may all change if policies are changed.

Besides the 2008 Fiscal Budget, the most potent threat may also come in the in the governor’s monetary policy statement which is now due this week. The launch of Operation Sunrise 2 is unlikely to cause the stock market to level off. 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.

FOREX MARKET

The 2008 budget did not announce an adjustment in the official exchange rate, which remains at US$1:Z$30,000.00, none was really expected. The disparity between the official and parallel market prices will make any piecemeal adjustment an exercise in futility. After the announcement of the Fiscal policy, the Zimbabwe dollar took a battering on the parallel rate sliding more than 40 percent in a single week from £1: Z$5,2million on the 26th of November to £1: Z$7,1million this week. Rates are expected to stabilize after the launch of the RBZ’s new currency in Sunrise 2 as dealers adjust to the new measures.

A change of currency alone is unlikely to cause the long-term stabilization of the Zimbabwe dollar. Without a policy adjustment, inflows through official channels are expected to remain thin given the premium on the parallel market. The continued widening of the gap between the official and the parallel market rates will make it totally impossible that the market will use the official rates. This is likely to increase corporate illegitimacy and possible arrest for business people. Needless to say, the foreign currency market will continue to be driven by demand and supply fundamentals.

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. This would be the second time that the RBZ has slashed zeros from the Zimbabwe dollar. 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. The slashing of zeros may only work for a short while. Sustainable measures will need to be introduced for long-term stability for the benefit of ‘the people’.

PERSONAL WEALTH MANAGEMENT

In the next couple of weeks, the Coronation Team will publish personal wealth management advice to our customers on popular investment structures such as offshore investments, establishing investment trusts, investment options for children, wills and testamentary dispositions and how to start an investment club or investing in a syndicated fund. How you invest is as important as what you invest in.

The Coronation Team believes in empowering investors not for a season but for a generation. Investment structures are critical in personal wealth management. Often, there are advantages and disadvantages, including tax implications when you invest in your personal name, through a trust or a company. The way you structure your investment portfolio is particularly important when trading or investing across jurisdictions, protecting your wealth in the unfortunate event of your death and investing for your children from the day they are born.

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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