Markets in turmoil: is meltdown imminent?

• Financial Market Report (August 9-15 2007)

• Financial Market Report (August 2-8 2007)

• 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

“Nothing in the world can take the place of persistence. Talent will not; nothing more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated failures. Persistence and determination alone are omnipotent” – Calvin Coolidge

OVERVIEW

Amidst the news that the Zimbabwean government is expected to announce a new price control policy after the Heroes holidays, market analysts expect the new policy will ease the blanket price freeze giving breathing space to besieged firms.

Our analysis is that price controls will be to the 2008 election, what the land policy was to the 2000 one. Price controls, good or bad, represents ‘soft paternalism’ by a protective state, suspicious of the business sector. How much the state should ‘show its hand’ in correcting market failures is a matter for debate.

Economists, however, generally agree that price controls are harmful to any economy (Ghosh and Whalley, 2003). Empirical evidence suggests that strong price control enforcement results in shortages and resource misallocation, whilst weak enforcement leads to the black market and high transaction costs.

If the controls were not to be removed altogether in the pending policy, the way forward would be to immediately create mutually agreed formulas for pricing sector commodities to allow fair return and business sustainability. A clear policy, no matter how harmful, is better than market uncertainty and is likely to benefit both government and industry.

The Finance Minister is also to announce a supplementary budget soon. This is expected to support the price controls and possibly increase support to distressed companies as an olive branch euphemism synonymous with ‘destroying a house to build a shack’.

By June 2007, the distressed companies fund had reportedly taken up Z$3,2 billion, saving approximately 30 companies from collapse. Going into the third quarter, the market performance will be continue to be affected by price controls, which are likely to converge with the indegenisation bill, by chance or by design. The inflation blackout, pending monetary policy and company results will also determine market direction.

STOCK EXCHANGE UPDATE

The good returns on the stock market thus far have been the result of too much money chasing few investment options outperforming inflation at 4500% on the last count. Stock markets are not for investors with neither nervous trepidation nor the timorous faint hearts. The cyclonic storm on the market is likely to affect stock prices for a season to come, causing the weak to suffer sleepless nights.

Last Friday, the index rose a marginal 0.56 % to close the week at 32 909 293,59. When it opened on Wednesday in a short trading week, the index lost a marginal 0.11% to close at 32 871 553.13 owing to mixed trading across most counters. Top gains were recorded in FBC, up $1100 to close at $7100. CBZ, DZLH and FML also recorded decent gains. Major shakers were BAT, CIRCLE, and TSL which dropped $2 000 to $7 000. Kingdom and SEEDCO were also in the drop zone. Investors are advised to hold their nerves and exercise chameleonic caution.

FIGURE 1: INDUSTRIAL INDEX (1st to 15 August 2007)

Source: Coronation Advisory

Expressed in corporate finance jargon, stock price fluctuations are always equal to the square root of the price. In simple terms, avoid panic selling, price controls or not, the medium term view on the stock market will be decided by the inflation outlook and the liquidity situation in the money market. Both favour the stock market. We advise investors to watch the market closely, pick up the Dips and avoid ‘catching the falling knives’

STOCK MARKET OUTLOOK

Short-term bargain hunters are advised to pounce on weakness; counters such as NMB, CFX, Pioneer, Willdale and Zimpapers have immense upside potential. Seasoned investors are advised to focus on value because speculative traders to their detriment often focus on outlook and trends. Recommended value picks are counters such as ABCH, CBZ, FBC, RioZim, Econet and Old Mutual. Most of these counters have strong balance sheets, strong cashflows and low gearing.

A number of regional players continue to eye the market, with recent indications that Sanlam Fund Managers are planning to pounce on some Zimbabwean counters, which are undervalued compared to their peers in other parts of the world. Based on current fundamentals, the only way the stock market will experience a permanent meltdown is if interest rates are increased or the dollar is devalued, both are unlikely. Strong earnings are expected to support the market to stability.

ABC Holdings Seeking to raise US$20 million

ABC Holdings is in the market, seeking approval from shareholders to disburse 10 percent of its shares to International Finance Corporation (IFC). The company has published a circular to shareholders explaining the salient features of the convertible loan facility. If the transaction is approved, it will see the IFC extending its seven-year relationship with ABC raising a total of US$20 million additional debt and capital.

The EGM is set for September 21 in Botswana. The transaction will raise funds for the company’s regional expansion programmes and working capital for its subsidiaries. ABCH was established in 2000 following the merger of UDC, Bard Discount House and First Merchant Banking Corporation. Its primary listing is on the Botswana Stock Exchange and has a secondary listing on the ZSE and has branches in Mozambique, Zambia, Tanzania, Botswana, and Zimbabwe. This transaction is expected to unlock shareholder value improving regional US$ contributions to the group.

INTERNATIONAL MARKETS

The US sub prime fallout has officially ‘contaminated’ world markets at the speed of ‘foot and mouth’. The storm caused by issues relating to banks’ exposure to loan defaults in the lending markets saw the FTSE 100 fall sharply in previous weeks.

On Friday 10, July, nearly GBP56 billion was wiped out from the value of leading companies. Analysts expect the volatility to continue for at least another month. The JSE, taking its cue from world markets is currently hovering in the red, trading 300 points below mark on 15 August. Bank of England policymakers were, however boosted in their fight against inflation by news that inflation for July eased to 1.9% compared to 2.4% in June.

EXCHANGE RATES

CURRENCY	OFFICIAL RATE	PARALLEL RATE
US$	250.00	211,000.00
ZAR	34.19	35,000.00
British Pound	491.55	400,000.00
Botswana Pula	39.78

Source: Coronation Advisory

Exchange rate movements remain marginal. The ZWD: GBP traded soft from Z$385 000 at the close of last week to between Z$400 000 and Z$405 000 today. In the short term, price controls appear to have managed to stabilise rate movements. There are fears however, that the controls have created regional price distortions, with some commodities being cheaper in Zimbabwe than in neighbouring countries.

One analyst observed that due to the price cuts, cement is available in Zimbabwe for Z$480 000 (US$2,50) a bag compared to the regional price of between US$7-10. The temptation to illegally export the product for a US$ return may prove too difficult to resist. Although rates may have breached the psychological Z$400 000 barrier, we expect rates to climb aimlessly, based on no fundamentals, whilst corporates awaiting policy directions.

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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