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Stock market set to maintain glamour
By
Willing Zvirevo
THERE is convergence of opinion amongst economic analysts
that the 2008 fiscal budget presented by the Minister of Finance last
week failed to provide the platform required to deal with the country’s
major challenges, chief among them the spiraling inflation, acute foreign
currency shortages and declining productivity.
The main source of inflation in Zimbabwe is excessive money supply growth, itself a result of burgeoning Government expenditure and the deluge of concessionary funding into the market from the central bank.
The 2008 budget projects total revenues of $6 080 quadrillion against projected expenditures of $7 840 quadrillion, implying a budget deficit of $1 760 quadrillion or 11% of the country’s Gross Domestic Product (GDP). GDP is forecast at $16 000 trillion in 2008, representing a growth of 4% over 2007. Given the absence of external credit, the budget deficit is expected to be funded through domestic debt.
Analysts have ruled out the projected GDP growth of 4% as overly unrealistic, particularly given that the fiscal budget lacked clear-cut policies to deal decisively with high inflation and low productivity.
The Minister’s economic growth projections are premised on the expected recovery in the agricultural sector on the back of the ongoing Farm Mechanisation Programme and continued concessionary funding under the ASPEF facility, as well as the anticipated, albeit unspecified, growth in the SME sector.
Agriculture contributes 15-20% of national output; hence the recovery of this sector alone would not reverse the negative growth that the economy has experienced for nearly a decade. Activity in other real sectors such as manufacturing, mining and services is expected to remain depressed in the short to medium term given persistent foreign currency shortages, degenerating power cuts and undercapitalization, thus making the overall economic growth projections for 2008 optimistic. Performance in the manufacturing sector is also expected to be weighed down by the adverse effects of the ongoing price controls.
Whilst the Minister expects the budget to drive down inflation to 1 978% by the end of 2008, it remains unclear how this will be achieved when the 2008 expenditure figures look astronomical in comparison to 2007 budgetary figures, and considering that the budget will be partly funded through expensive debt. Increased borrowings by government and the RBZ’s continued quasi-fiscal activities are expected to fuel inflationary pressures, thus giving a gloomy inflationary outlook in the short to medium term. Against this background, and given the paucity of investment options, the stock market is expected to maintain its current glamour.
Since mid-year we have been encouraging investors to invest on the stock market. With the current fiscal framework, the country’s economic fundamentals, particularly the inflation outlook, do not look promising in the short to medium term, hence investors should protect the value of their money by going for investment options whose returns match or beat inflation. The stock market has historically done that and, barring any injudicious policy measures from the authorities, we expect the stock market to remain the most profitable investment option. In case there are still investors who shun the ZSE, this is another of our wake-up calls!
STOCK MARKET UPDATE
The week ending 7 December 2007 was characterized by mixed trading, with investors systematically reaping profits on some counters and also taking new positions ahead of year-end. However, the deepening cash crisis presented a predicament for investors who were drooling at profit-taking opportunities, as some investors could not bank their profits in fear of seeing their money rotting in the bank.
Despite the mixed trading, the industrial index gained by 20% to close the week at 1 322 856 863.80 points, whilst the mining index shed 6% to close at 1 379 473 682.90. On a year-to-date basis the main index has risen over 230 000% and the mining index has recorded a growth of around 337 000%. These growth rates are way above year-on-year inflation which stood at 7 982% in September 2007 and is forecast to close the year around 20 000%.
TABLE 1: MOVERS & SHAKERS
| Movers | Shakers | ||||||
| Counter | Price 30/11/07 |
Price 07/12/07 |
% Change | Counter | Price 30/11/07 |
Price 07/12/07 |
% Change |
| Halogen | 11 000 000 | 50 000 000 | 355 | Circem | 8 000 000 | 5 500 000 | -31 |
| CAFCA | 110 000 | 450 000 | 309 | CFI | 200 000 | 145 000 | -28 |
| Pelhams | 6 500 | 25 000 | 285 | Dawn | 200 000 | 150 000 | -25 |
| Zimnat | 70 000 | 250 000 | 257 | Hunyani | 200 000 | 150 000 | -25 |
Source: Coronation Advisory
During the past week, fifty-seven counters gained, ten were unchanged at previous week’s levels whilst fifteen counters were in the red.
Mixed trading continued into the current week, resulting in the industrial index gaining by a paltry 1% and the mining index remaining flat by the close of trade on Monday 10 December 2007.
The market is likely to continue in jig-saw fashion for the better part of next week, but is expected to steam off by the end of the week or early the week after. Our favourate picks currently include Cottco, Interfresh, Chemco, PPC, Bindura, CFI, TA, Econet and ABCH.
STOCK MARKET OUTLOOK
The 2008 fiscal budget came and, as expected, did not provide any remedy to the inflation scourge. Admittedly, the budget was crafted under very difficult conditions. The market is still awaiting the second half monetary policy statement for 2007 from the Reserve Bank of Zimbabwe (RBZ). The RBZ is expected to come up with monetary policy measures that support the budgetary objectives for 2008.
However, the central bank will be in a catch 22 on interest rate policy, as increasing interest rates in line with inflation will result in a bloated debt position for Government. The central bank is also expected to continue pumping concessionary funding into the market via BACOSSI and ASPEF, thus fuelling money supply growth. We therefore expect the current upward trend in inflation to continue in the short to medium term. Given the foregoing, the stock market is likely to remain the main attraction for investors in the first half of 2008.
However, as we have always said, investors should resist instinct and base their investment decisions on fundamentals. The ghastly trading environment is expected to bring with it viability challenges for businesses. It is therefore recommended that investors park their money in companies that are expected to survive the current torrent and have good long-term prospects. There is no better advice than that provided by Warren Buffet, the renowned American fund manager: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. As the market slows down ahead of the festive season, investors should dismount from their current excitement and take advantage of any temporary weaknesses to pick quality stocks on a medium term view.
CASH SITUATION
The cash crisis entered its fifth week with no solution in sight. Consumers who had pinned their hopes on the “imminent” launch of Sunrise 2 are now totally disillusioned. The cash crisis has become so calamitous that an urgent, albeit momentary, measure was expected from the central bank to alleviate the situation.
Whilst the central bank Governor has taken the stiff position that he will not inject additional liquidity into the market until the circa Z$30 trillion “missing” from the official banking system has been returned, black market activities have continued to prosper and cash barons have continued to benefit from selling off their cash holdings. It is the poor consumer that continues to suffer, and it is the poor consumer that will have a sordid festive season.
The cash crisis has also created opportunities for corrupt activities within the banking system. We implore the central bank to follow the daily cash allocations to banks to see if all the cash is going to the consumer or some of it is disappearing within the banking system only to find its way to parallel market traders. Tip: the central bank could request banks to submit daily returns of cash withdrawals, listing all amounts withdrawn by customer. We bet you some banks would cringe to such a request! No matter the justification, we deplore the fact that consumers are being asked to buy their own money to access cash.
Indications are that the crisis has created another thriving cash black-market wherein consumers are being asked to pay a 10 percent premium on cash. For the benefit of consumers currently outside Zimbabwe who cannot understand this phenomenon, lets say you have Z$200 million in the bank and you want to withdraw all of it. A cash baron, will charge you Z$20 to $30 million to give you cash, reducing your hard earned money value to Z$170 million. Options are few, if you keep the money in the bank; it is worth less the next day. Our economic crisis has resulted in Zimbabwe being the only country where consumers have to buy money.
For our recommendation on Money Transfer Agents or to receive exchange rate updates by text or by email, call us on 07960162142 or email crownexchange@btinternet.com
FOREX MARKET
Exchange rates for cash transactions have remained soft as cash shortages persist. The USD is currently trading between ZW$1.5 million and ZW$1.6 million for cash transactions, whilst the Rand is in the ZW$180 000-200 000 range. The USD is currently quoted between Z$4.5 million and Z$5.0 million for RTGS transactions, whilst the Rand is trading between Z$250 000 and Z$300 000. The disparity between RTGS and cash rates is expected to continue widening as the cash crisis deepens. The pound rate continued to adjust upwards. By the end of this week and within touching distance of the Z$10 million mark. The rate in London was hovering around £1: Z$9,8million on Wednesday, changing more than 3 times within the same week.
PERSONAL WEALTH MANAGEMENT
Investments for your children
A common problem faced by many African children has been the lack of investments which gives them a jumpstart when they reach working age. The result is often a frustrating start to adult life, resulting in a competitive disadvantage to their peers.
Many nationalities such as the Indians or Caucasians have long histories of establishing investment trusts for their children the moment they are born. By the time they are 18, they have access to a trust fund or a bank account with a reasonable investment allowing them independence. Studies have shown that a child is more likely to become financially independent or experiment with starting their own businesses if they have no concerns about buying their first house, a bed or meeting their own bills.
A long-term investment is particularly ideal if you would like it to mature just when the child you are investing for does (although the two may not necessarily correlate). Any parent who has not taken the step to at least open a savings account for their children from the first year they are born is guilty of serious neglect. Failing to structure a proper investment for your children perpetuates a cycle of poverty, creating dependency for your children and robbing them of a critical competitive advantage. Here are some useful tips on how you can start creating a different kind of future for your children.
1. Start by opening a simple bank account in the name of your child. Most high street banks have a facility which allows you to open a children’s savings account as long as you have a birth certificate for the child. This facility is available from banks such as Barclays, Halifax or HSBC, Bank of America or ABSA in South Africa.
2. Have a stop order into the account every month to allow for regular investment.
An investment of as little as £50-100 pounds every month although seemingly small could result in a payoff to your child of between £10 000 –20 000 by the time they are 18 years old. Imagine your swell of pride handing over a chequebook with this tidy sum and the grunt of thanks you will receive.
3. Consider establishing an investment trust in which your children are the beneficiaries. We will explain in a later series how investment trusts function.
Investing for your children guarantees that they do not get into the same ‘rut’ as you did. In whatever currency, ZWD, £, USD or ZAR, the earlier you start the better. It is a fulfilling experience, with children you never know which way things are going to go, like all good mum, Coronation only wants the best for you and your children, although we do not have a children’s investment portfolio in our books we can refer you to where you can get help.
Willing Zvirevo
is a Financial Consultant at Coronation Financial Plc, 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
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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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