ZSE to impress despite hyperinflation

By Lance Mambondiani

OVERVIEW

IT IS not difficult to see why many investors have an apathetic view towards investing in Zimbabwean markets. On the surface, the hyperinflationary conditions have discouraged many investors without a deeper technical ability from even thinking that any investment instrument can be viable when all other macroeconomic conditions are worsening.

A popular market cliché suggests that economic agents are driven by fear and greed and in difficult times the overlap between the two is one of the primary drivers of market volatility. The stampede towards the stock exchange, the currency market and the scramble for property investments suggests a new method of investment appraisal within a volcanic economic environment in a deeply troubled country.

Financial market prices are determined by the ‘collective result of the fear/greed equation’, and in times of severe distress the notion of ‘investing on value’ becomes a romantic phenomenon.

Investors have been clinging to anything and everything on the stock market because it’s the only option that will prevent them from being burnt or from the fear of waking up and finding their investments worth less than the paper it’s printed on, much like the Zimbabwe dollar.

Consider the disparity between the stock market and the money market which has been trading in the negative for the greater part of 2007. Investment rates for 7-14 day money market investments were quoting a rate range of 150 percent to 300 percent whilst 60-90 money was attracting rates of 100 to 250 percent.

With inflation quoted at over 24 000 percent, an investment on the money market represents an approximately 20 000 percent negative yield. With the stock market yielding 322 111 percent in 2007, there is no robotic science needed to understand where investors will go.

The hyperinflationary conditions, recently analysed in a well-researched article published on New Zimbabwe by exiled banker Gilbert Muponda highlights succinctly, the impact of inflation on investment options. The article analyses the problem with the current Treasury bills system, wherein the RBZ borrows through TBs at 340 percent, well below inflation at 24 000 percent, then on lends the money at 25 percent. The picture is even darker when you consider the inflation data blackout since October 2007 and that the 24 000 percent quoted is considered an unofficial ‘black market’ figure.

The real question is whether there is any ‘real money’ to be made on the ZSE. Our job as investment advisors is to point to the figures and allow our clients room for cognitive thought. Despite the bad news, the stock market has done significantly well on selected counters. At the basic level, most good stocks have outperformed the inflation rate at the ‘black market’ figure.

Being largely driven by local money, the performance of the ZSE in Zimbabwe dollar terms is incredibly impressive. The increased number of Diaspora investors who change their currency into Z$ to buy shares on the ZSE are more worried about whether their portfolios will measure up to currency movements on the parallel market. Although this often involves complicated valuations depending on the rates used, our previous technical analysis revealed that the stock market has previously outperformed currency depreciation many times over.

Besides, Zimbabweans in the Diaspora have no history of investing in the countries in which they are resident due to the unfamiliarity of the markets. If you are not investing where you are, it seems reasonable to consider investing in an investment option back home if it can yield above inflation returns. Broad money supply will continue to favour a stock market rally with intermittent profit taking. The year 2008 will again see super profits being made on the ZSE as investors try and find a home for their money. The winners will be the investors who take positions early in the year, who know when to exit and better yet, have a lot of fun doing it.

STOCK MARKET UPDATE

The Bull Run has surely caused a stampede to the stock market in the last quarter of 2007. The problem with this for stock-broking firms is an increase in administrative costs due to a rise in speculative trading by ‘in and out’ traders. As a result, a number of brokers have increased minimum investments to between Z$1 and Z$5 billion per counter. The ZSE has now been accused of being a billionaires club with small time investors being encouraged to pool their investments or to invest in unit trusts.

Whilst this may appear to be the case, Z$1 billion does not seem to buy much these days. The challenge is for brokers to keep up with hyperinflationary conditions and remain credible as proper businesses. With money market dealers currently quoting between 120-130 percent TB Rates for short term and between 140-160 percent for 30 to 90 days, investing on the bond market is financial suicide. The scramble for shares is indicative of a market starved of meaningful investment options.

Meanwhile, the rally on the stock market continues to be glamorous. The industrial index opened the week 8.51 percent up to trade at 2,44,462,555.93 points following gains in Celsys, Afdis, Star and Zimpapers with only three counters trading in the negative. Tuesday trades confirmed the bulls rampage, with the industrial index again firming 8.60 percent to close the day at 2,657,910.872.53 points due to widespread gains in Zimsun which traded up 121 percent, MedTech up 74 percent, Astra up 64 percent, Willdale 60 percent and OK 57 percent.

With such an impressive run, it is easy to forget that share index appreciation of 8 to 15 percent experienced on the ZSE is a rare phenomenon anywhere else in the world possible only in a dysfunctional market. However, whether the market is dysfunctional or resembling more of a casino than a stock exchange, with a YTD beyond 322,111.00 percent, few investors would be complaining. Intermittent profit taking as was the case on Thursday when the main index succumbed to profit taking, shedding off 6.52 percent to close the day at 2,534,456,413.04 points will serve to constantly remind us that shares prices can actually swing the other direction in a flash. For seasoned investors, these momentary lapses will provide golden opportunities to buy cheap.

STOCK MARKET OUTLOOK

Although it is quite possible that increased traffic to the bourse will create an asset bubble with calamitous consequences, our money is on the stock exchange charging past the 3 billion-point mark before elections in March 08. Investors appear to be in one big hurry to realise returns on the market as if money is going out of fashion. We encourage investors to take advantage of this opportunity and increase their exposure to shares in the first quarter of 08. So how can you make money on the market when it’s already in a Bull Run with share prices appearing overpriced?

One way of realising significant returns on a charging market is to do a swoop on low cap, penny stocks. Based on simple arithmetic logic, since ranking and portfolio performance is by percentages, the big percentage gains always unfairly go to the smaller stocks, although some higher priced shares have also come close. Chances of a higher return for speculative investors is therefore in counters such as Celsys, CFX, Zimpapers, ZPI and OK Zimbabwe. Price dynamics dictate that fewer prices will remain in the 100 000 threshold for long. A number of counters currently below this threshold, with good fundamentals, are set to benefit. You should, however, be careful and not confuse an undervalued stock with one that’s simply ‘a dog’.

The ZECO IPO is also a good opportunity to get into the market on the cheap. ZECO is listing within a challenging manufacturing sector reeling under the effects of decreased productivity due to a contracting operating environment. Although the current outlook on the Manufacturing sector is gloomy due to a hyperinflationary environment and price controls which caused production costs to be way above profitability, future prospects may not be so bad. We however believe that the ZECO IPO is a good buy for two reasons.

Firstly, for long-term buyers, the manufacturing sector is always the first to recover under a positive business environment. Secondly, the offer price of Z$24,927 makes it one of the cheapest stocks on the market even before it is listed. Few counters with the same fundamentals in the manufacturing sector are trading at such a low price. By the time the company lists on the stock exchange on February 22, the offer price will most likely be way below market value and can easily correct significantly in the first week of trading followed by a possible stagnation thereafter.

Based on technical analysis by some brokers, the valuation of ZECO using the Net Asset Value (NAV) formula would yield a value of Z$46,421.80 per share, representing an 83 percent premium and upside potential on the offer price. If you factor in a 10 percent market driven appreciation by February 22, our estimate yields a conservative fair price of approximately Z$55 000 per share.

The offer price is therefore a possible bargain, which is likely to be a fraction of the real value by the time the counter lists in February. We consider the ZECO IPO as one possible opportunity likely to create value post listing for speculative ‘hawk investors’ and good long term value for long term investors with ‘bags of optimism’ regarding the future. We consider this a BUY.

To subscribe for shares in the ZECO IPO, contact the Coronation Team before January 21, 2008. The IPO closes on the 25th of January 2008.

FOREX MARKET

The Zimbabwe dollar notched up 31 percent against major currencies in the week under review moving from last week’s rate of £1: Z$7,5million to Z$9,8 million against the British pound. The parallel exchange rates are now trading approximately 32 566.67 percent from the official rate which remains pegged at 30 000 to the US$. At these levels, any pretence that trade by industries in foreign currency should be at the pegged exchange rate has been stretched beyond a joke.

The standard deviation between the official and the parallel market rate stretches thin, the probability that any company will be able to acquire money at the official rate. Figures don’t lie; they have the nasty habit of revealing cover-ups, half-truths, scare tactics and distortions regarding nasty secrets. If we are agreeable that math involves perfect logic, then statistically it is impossible to convince any sensible human being regardless of megaphone calls for patriotism to trade in a market that 32,566.67 percent divorced from reality.

Whilst there is agreement that currency misalignments and gyrations associated with floating exchange rates can have serious consequences for developing countries with small and open economies and a relatively large stock of national debt. It looks particularly challenging that a pegged exchange rate can help stabilise macro-economic fundamentals within a 100 percent importing economy with dwindling exports due to industrial contractions.

Although realistic exchange rate realignment is almost impossible, three months before a watershed election, the official rate is in need of an adjustment for it to retain any sense of credibility. The widening gap between the state rate and the rate on the ground will remain in itself a source of fuel for a combustible rate collapse which will be the tipping point of an economy ravaged by a sequence of man-mad disasters.

The current rate slid in the market has been a result of the cash problems currently being experienced in the market. Current developments also point towards heightened tensions between the central bank and market traders. Recent reports suggest that a prosecutor has called for an investigation into the central bank’s role in the parallel forex market following the bank’s payment of Z$2,1 trillion dollars to Flatwater Investments to buy foreign currency for the procurement of tractor for the Mechanisation Programme.

Based on this transaction alone, the details of which are a matter of record, a ‘reasonable man’ being that common man in the street would conclude that the central bank is involved in procuring currency on the ‘black-market’ to finance the nation’s supplies. Although this is not particularly problematic, if this were the case however, it is problematic to see how the central bank would remain a moral authority in prosecuting business for trading on a similar platform in which they are the biggest player.

For exchange rate updates exchange rate analysis and registered money transfers contact Crown Exchange by text on 07960162142 or email crownexchange@btinternet.com Service available in UK, USA and SA.

Going forward, our analysis is that the Zimbabwe dollar will continue to slide against major currencies in the run up to the March elections. There is no precedent for the government tinkering with exchange rates ahead of an election. The method of containment will most likely be a continued crackdown on foreign currency dealers.

Rates on the parallel market are likely to adjust upwards, struggling to find a bottom as government increases imports to fund concessionary programmes in ‘the people’s budget’. This may result in increased business for traders in the run up to the elections.

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.
_____________________
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

JOIN THE DEBATE ON THIS ARTICLE ON THE NEWZIMBABWE.COM FORUMS
newsdesk@newzimbabwe.com