ZECO IPO leads New Year activities on the ZSE

By Lance Mambondiani

OVERVIEW

THE Financial Year 2007 turned out to be quite an eventful year for financial markets in Zimbabwe.

We had price controls, the introduction of empowerment laws, a quadrillion-dollar budget and a quadrillion-dollar stock market whilst inflation topped 24 000 percent.

All economic indicators continued to point east, plunging the country into a deepening economic turmoil of catastrophic proportions. The Finance Minister predicted positive growth in 2008 and a slow down in inflation, although such optimism seemed unsupported by fundamentals on the ground

Property prices soared, with some middle density houses in Harare costing more than a house in London or Sandton inflated by an asset price bubble blamed on diaspora money chasing too few houses. The stock market defied economic indicators and rallied for the greater part of the year trading in record territory and bringing handsome rewards to many investors.

The industrial index closed the year up 322 111 percent at 1 911 538 281,84 racing towards the 2 billion mark. The mining index closed the year up 477 752 percent at 2,363 257 849.25 points as the stock market remained a haven from hyperinflation. The stock market remained a spot of bother for the authorities being the last remaining ‘free market’ in an increasingly interventionist policy environment.

Many investors entertain hope in 2008 and dare to believe that the year will see an improvement in our circumstances. It appears, however, that we started 2008, the way we ended it, amidst policy confusion and flip-flops. The central bank governor, Dr Gideon Gono made a nocturnal policy statement on Wednesday 19 December 2007, shelving plans for the introduction of a new currency and introducing higher denomination bearer cheques.

The Z$200,000 bearer cheque which was the highest value note was to be phased out and higher value cheques of Z$250,000, Z$500,000 and Z$750,000 started circulating the following day. This was an attempt to ease the cash problems that had gripped the country, paralyzing the payment system. The central bank then extended the deadline to exchange Z$200,000 dollar bills previously set for the 31st of December 2007 hours before the bills ceased to be legal tender.

Indications are that the bills will not be phased out after all, seeing Sunrise 2 resulted in the recovery into the banking system of currency believed to have been hoarded by parallel market dealers. New stringent RTGS rules were also introduced within the same period but later relaxed.

The introduction of new denominations is also a direct result of inflationary pressures on the dollar, with the same amount of monetary units continuously decreasing purchase power impeding the well being of daily transactions because of the risk and inconvenience of carrying large stacks of bills.

The governor refused to consider a redenomination of the currency or the slashing of more zeros from the currency, discounting the strain on bank IT systems as diminimis amidst accusations that some banks were working in cohorts with a group now the new target of economic saboteurs popularly referred to as ‘cash barons’. Policy makers have often been quick to mention that Zimbabwe’s economic circumstances are quite unique and cannot be solved by textbook economics.

The current policy changes in Zimbabwe hardly constitute coherent economic policy. Although our economics have turned into that of ‘adaptation and survival’, dynamic inconsistency provides a theoretical basis for discussions on policy clarity and credibility. Without a commitment to future policies or a consistency in the present ones, the incentive to speculate and deviate into an informal market is often greater resulting in the worsening of conditions. This lack of clarity itself is often the single largest contributor to black market transactions.

The central bank in its diligence to turn around the economy has been leading the crackdown on the so called ‘economic saboteurs’, such as errant bankers, money transfer agents, hotels, government ministers accused of externalizing currency and now the cash barons.

Whilst this is commendable, introducing policy measures to deal with people instead of fundamentals will reduce the central bank into the Human Resources department of the country, wasting time and resources on introducing policies to manage human greed and not long term economic policy. It is unlikely the central bank will be able to chase errant behaviour between Harare and the UK and still manage to remain effective as a monetary authority. Policy effectiveness will require monetary authorities to return to basic economic fundamentals and monetary policies to address some of the basic problems.

STOCK MARKET UPDATE

The stock market is showing no signs that it is ready to slow down. The hyperinflationary conditions created by the injection of Z$33 trillion in new bearer cheques of Z$250 000, Z$500 000 and Z$750 000 with the launch of Operation Sunrise 2 is expected to continue favouring equities. About Z$100 trillion is now in circulation following the recovery of a greater portion of the Z$65 trillion believed to have been in the black market.

Sunrise 2 ensured a positive start to the New Year. Compare this to international markets, where the Dow experienced the biggest ever first day of the year fall, retreating 220 to end the day at 13,044. Other indices were also trading lower: the tech-rich NASDAQ fell 42 points to end the day at 2,609, whilst the S&P 500 was down 21 points at 1,447. In London, the FTSE 100 fell back from an earlier high of 6,512 as Wall Street opened in a tailspin, ending the day down 40 points at 6,416.

The ZSE, largely dominated by local punters has no trading correlation to international markets, traders can ignore fears of a US recession and concentrate more on Operation Sunrise. After opening the New Year on a high, the industrial index had breached the 2 billion point mark by Thursday, appreciating 4.24 percent to end the day at 2 036 407 933.97 following widespread gains in counters such as Chemco up 80 percent, BAT (60 percent), Zimsun (51 percent) TSL (50 percent) and Natfoods (50 percent). Counters in the red included OK, Old Mutual, Kingdom and Pearl. The mining index added 8.23 percent to 2 611 363 679.42 following gains in BNC up 35 percent, FALGOLD was also up 25 percent. Gains were also recorded in Halogen and Hwange. Good times continue to roll for investors on the stock market.

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

STOCK MARKET OUTLOOK

With no change in fundamentals in the foreseeable future, the stock market, property market and the currency market is expected to remain investors’ refuge against inflationary pressures. Historically, the end of the year is always forecasted to be a slowest trading season, providing investors with an opportunity to pick up shares on the low as shares take a battering due to profit taking.

The end of 2007 surprised many analysts. The market failed to slow down but steamed towards the incredulous 2 billion-point mark. The ZSE is the only exchange on record with a billion-point calibration. Although this would match conditions on the ground, the problem is that a billion point stock market calibration is incomprehensible to the world outside Zimbabwe, which may inadvertently deter foreign interest to the local bourse. Investors are urged to sniff opportunities early, well before the March 2008 elections.

The Zeco IPO may be one such early opportunity. Coronation Top 5 picks for an early break are Rio Zim, Old Mutual, NMB, Celsys and Zimsun. Many investors are now aware that with a good financial advisor there are decent profits to be made on the ZSE, many more were uncertain on whether the super profits could be believed. We believe 2008 will see an increased activity on the exchange, investors must equally prepare for tidal discomforts as the market is expected to trade in troughs and short profit taking cycles. Opportunities to pick up shares on the cheap may be few in the first quarter.

ZECO HOLDINGS LIMITED IPO

Zeco Holdings Limited, a company made up of Bulawayo-based Zimbabwe Engineering Company and Crittical Hope, a steel and fabrication company based in Harare, opened its Initial Public Offer on Wednesday, January 2, 2008. The companies are owned by flamboyant Harare businessman Philip Chiyangwa through Native Investments Africa Group. A total of 808 571 428 shares are on offer at an issue price of Z$24 927 per share.

ZECO IPO TIMETABLE

IPO Opens	2 January 2008
IPO closes	25 January 2008
Submission of results to listing Committee	1 February 2008
Publication of results	8 February 2008
Listing date	22 February 2008

The lead financial advisor of the IPO is TN Financial Services, one of the best corporate finance outfits in Harare. TN financial services, led by Tawanda Nyambirai, has structured a number of major deals capable of unlocking shareholder value out of deadwood. The offer is also being underwritten by CBZ Holdings. The IPO has so far received mixed reviews with the negatives often cited as the reputation of its largest shareholder.

Regardless, the listing will remove any risk associated with a single overbearing shareholder. It is however expected that the share price will benefit from the current bull-run on the ZSE. An IPO of a company with underlying value is often the best way for traders to get into the market. Share prices often adjust upward on listing. Consider the Pearl share price which has appreciated 5,138.1 percent since listing or the ZPI share prices which is up 3,900 percent despite stagnating for a while from the listing date.

A common strategy to manage an IPO with a weak price forecast is to issue brokers with a buy and sell order at an agreed price reducing chances of an exposure and existing when you have made your money. We recommend this as a buy. For more details on how to participate in the IPO contact the Coronation Team.

FOREX MARKET

Exchange rates for cash transactions have remained soft in the wake of cash shortages experienced over the festive season. The USD is currently trading between ZW$4.0 million and ZW$4.5 million for cash transactions, The rate in London was trading within the £1: Z$7,5million range on Wednesday having suffered a contraction on the back of new RTGS requirements previously issued by the central bank. The requirements, which set an unrealistic limit of Z$200 million per transaction together with a requirement to prove source of funds soon proved unsustainable within days of its introduction. The RBZ in conjunction with the police also launched a crackdown against illegal foreign currency dealers in Harare causing traders to go under. Rates are expected to continue trading softer in the next couple of days due to a mix of the renewed crackdown on currency dealers, cash problems and uncertainties over RTGS rules.

It is expected that the foreign currency crackdowns will continue towards the election period. By coincidence or conspiratory design, a number of Zanu PF senior politicians always seem to get into trouble towards the elections. Reports suggest that the chairman of the Parliamentary Budget, Finance and Economic Development Committee, David Butau fled to the UK fearing arrest in connection with a £573 000 payment made to Michigan Tractors in November. In his defence, the sitting MP that he and his committee were in fact investigating the central bank governor for unspecified improprieties. The tractors in question were sourced by the Reserve Bank for the Agricultural Mechanisation Programme. For reasons open to speculation, it appears the RBZ long accused of being the biggest player in the parallel market turned against its foreign currency suppliers.

Lance Mambondiani is an Investment Executive 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 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 Advisory © 2007 Reg No. 06342947

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