Zimbabwe Financial Market Report: A Pearl in the rough

A Pearl in the rough

• Financial Market Report (July 26 -August 1)

• Financial Market Report (19 July - 25 July 2007)

• Financial Market Report (29 June - 6 July 2007)

By Lance Mambondiani

"Wealth, like a tree, grows from a single seed. The first (money) you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed, the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade - George S. Clason in “The Richest Man in Babylon”

OVERVIEW

Although the majority of investors would find the words profitable and Zimbabwe to be oxymoronic, forward thinkers recognize the importance of positioning themselves in strategic industries for the future. The Zimbabwe Investment Authority (ZIA) recently announced the approval of projects worth US$400million during the six months to June 2007. The investments are from companies based in China, Malaysia and the Far-East sub-regions - no surprises there.

The government has also announced that the last session of parliament before the 2008 elections will discuss the enactment of the indigenization and empowerment legislation. Although investors are skeptical, under pain of history repeating itself, Zimbabweans in the diaspora with disposable income are encouraged to follow the developments closely. The economic impact of indigenization, negative or positive is often enduring and in some cases irretractable.

Unconfirmed reports suggest that the Control Order that would have outlawed commodity imports has now been shelved pending further consultation. There is also news of a pending supplementary budget largely expected to reinforce the ongoing price wars. The lack of official inflation statistics has started to have negative impact on economic forecasting and financial reporting for companies required by law to publish inflation adjusted financial results.

Our view is that a blackout on inflation data causes people to speculate on inflation causing price distortions. Unofficially, the Consumer Council of Zimbabwe (CCZ) published an inflation figure of 13,000%, implying the month-on-month for June to be 229.31%. IMF estimates that inflation will be 100 000% by year end, a figure that’s seemingly over-the-top. The central bank, battling with the return of the 0s has announced a new Z$200 000 bearer cheque with effect from 1 August 2007 soon after the increase in the daily cash limits.

ZSE UPDATE

The market continued to trade in short cycles based on cataclysmic policy changes. Marginal gains were recorded in a number of counters and cyclical fall in others as investors factored in the news that the central bank has postponed the monetary policy statement. The market nosedived again towards Friday 27 July 2007 as investors cashed out on cyclical gains. By Wednesday 31 July, the market appears to be on a recovery path leveling of the following day

FIGURE 1: INDUSTRIAL INDEX 26/07/07 – 01/08/07

Source: Zimbabwe Stock Exchange

On Tuesday, the industrial index surged 2,898,084.62 (8.51%) to close at 36,948,748.40 points spurred by Kingdom up a mouthwatering 180%, Tanganda up 50% to close at 60000 and Meikles added $25 000. The Kingdom share price appears to have responded to early indications that the leading bank is in discussions with a number of suitors regarding the possibility of a rectangular merger. Kingdom led the losses on Wednesday retreating 28.6% on, with Econet up 13.3% in a neat pattern of boom and bust.

TABLE 1: ADVANCES AND DECLINES

Movers Declines

Source: Coronation Advisory

The approaching June results are expected to cheer the market to further gains in the next couple of weeks. We advise caution, as the market remains unstable. Within this cycle, investors are advised to take the bitter and the sweet together to make lemonade, as the cycles are likely to persist. Whether the reporting season will have a significant impact on share prices remains to be seen. Buy recommendation are cheap stocks such as Zimpapers and Zimnat Lion. Other recommended counters are NMB, Kingdom and ZBFH, Econet, Old Mutual, ZPI and Meikles.

STOCK MARKET OUTLOOK

The end of the week may see sellers dominating the market as investors seek to consolidate gains. A number of investors had issued pending sell orders, stopped only because prices had bottomed out. Excitement in the next trading week will continue to be driven by the release of financial results and the Pearl IPO, which is now underway.

Pearl Properties – IPO Frenzy

In a market starved of mega-buck deals, the recent property based Initial Public Offers (IPO) have been a welcome boost for investors. Compared to Zimre Property Investments’ capitalization at Z$2,6 trillion, the offer of Z$4 200 per share for Pearl implies a prelisting market capitalization of Z$5,2 trillion which represents discounted levels of 18.7% and 37.3% to the Z$6,4 trillion and Z$8,3 trillion of its listed peers Marsh and Dawn Properties respectively.

In a normal market, property shares are bought mainly for long-term capital and income growth, usually showing a low current yield compared to the manufacturing and service stocks. As indicated last week, the growth potential will lie in the appreciation of the underlying capital value. Pearl may still suffer the same stagnation of ZPI, which hit a glass ceiling of 33% post-listing before settling at Z$1700. Despite investor concerns of the offer price being too expensive, the IPO is, however, expected to distinguishable based on a number of factors.

Firstly, the market seems to have stabilized from the mini crash triggered by the price control blitz. Secondly based on capitalization, Pearl is big brother to ZPI and lastly, the Pearl IPO is structured and supported by some of the best deal making brains in town and a whole army of underwriters who are interested in a piece of the cake. Foreign investors and Zimbabweans in the diaspora seeking growth opportunities have also shown an interest. Based on market trends, our view is that the price will be frenzied to a boom at least within the first week of trading by speculative buyers hoping to make a return when the share lists. We recommend Pearl as a speculative and a long-term buy. Investors in the diaspora need to be reminded that the offer closes on the 10th of August 2007.

TABLE 2: EXCHANGE RATES

CURRENCY	OFFICIAL RATE	PARALLEL RATE
US$	250.00	211,000.00
ZAR	34.19	30,000.00
British Pound	491.55	360,000.00
Botswana Pula	39.78

Source: Coronation Advisory

Rates moved marginally during the current trading week with the ZWD: USD rate edging slowly between Z$210 000 and Z$220 000 and Z$360 000 to the Pound. As predicted, the foreign currency market will continue to trade thin in tandem with the rest of the market and on the back of reduced demand. Parallel rates are expected to trade up in the next week after news that the Ministry of Trade’s Control Order to ban imports has now been abandoned. Although the Order had never been officially promulgated, the reversal points to the order’s unsustainability based on the widespread commodity shortages. The introduction the ZWD200 000.00 bear note and the increase in cash limit is also expected to increase demand.

INTERNATIONAL MARKETS
The international markets suffered an upheaval in the previous trading week. On Thursday, July 26, after seeing falls in European indices, the American markets went into a tailspin. The FTSE recorded its biggest slump in five years, retreating 203.1 points to 6251.2. The Dow Jones Industrial Average was down by 440 points, or 3.2%, at one point amid trading so heavy that it triggered curbs designed to reduce volatility. The JSE top 40 index also fell 1,98% to 25 809,55, its lowest levels since July 2.

The broader S&P 500 index and Nasdaq also suffered nightmare drops. Yields on Treasury bonds fell sharply (ie, prices rose) as investors flocked to risk-free havens. This appear to have been triggered by the suspension of major private equity deals leading to investment banks reducing their lending. The situation was also compounded by the dive in the Mortgage market with investors becoming increasingly worry of deliquencies. The worry is that the debt market is beginning to saturate, and concerns that equities and companies will be affected. Although the international markets remains jittery, the markets have started to experience sluggish recovery based on strong economic growth and firm earnings.

Lance Mambondiani is a Director of Coronation Financial Holdings, a financial advisory company registered in the UK. He can be contacted at coronation.uk@btinternet.com or on +44 790 329 3227
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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
Coronation © 2007

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