ZSE shares rally within a policy whirlwind

• Financial Market Report (August 30-06 September 2007)

• Financial Market Report (August 23-29 2007)

• Financial Market Report (August 16-22 2007)

• 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

Becoming wealthy is like playing monopoly, the person who can accumulate the most assets wins the game – Noel Whittaker

OVERVIEW

THE Zimbabwean financial market is by nature unpredictable and prone to mood swings with significant bouts of volatility due to spot policy changes. The government has invoked the Presidential Powers (Temporary Measures) Act to freeze all salary and wage increases soon after the volcanic price controls.

Under the new measures, no-one in public and private sector can now raise salaries, wages, rents, service charges, prices and school fees on account of increases or anticipated increases in the consumer price index (CPI), the official exchange rates, or value added tax and duty.

The freeze is aimed at reducing inflationary pressures from public and private sector salaries. Historically, a wage freeze has been used to reduce inflation. In all fairness, this has been attempted by major neo-liberal economies such as the UK, USA and Australia.

In 1971, President Nixon imposed a ninety-day freeze on wages and prices based on his determination to vanquish inflation with mixed consequences to the US economy. During the Labour government of 1945-51, Chancellor Stafford Cripps announced a wage freeze as the economy faltered with inflation running at 7.7 percent. Whether this contributed to Britain’s economic boom in the 1950s is inconclusive.

There are few examples on the impact of wage freeze on inflation as high as 7 634.8%. Zimbabwe may yet provide a test case. The success of this new intervention will not depend on the outcome of the freeze after six months, but the state’s ability to use the six-month window to address economic fundamentals.

The Minister of Finance announced the much-awaited Supplementary Budget on Thursday, 6 September. Significantly, the budget at Z$37,1 trillion against submissions by Ministries of Z$255 trillion, leaves a critical gap of Z$217.9 or 85% of requirements. How this gaping hole will be funded will determine the rate of inflation in the next couple of months.

The Minister also devalued the dollar from US$1:250 to 30 000. The income tax threshold has also been raised to Z$4 million to absorb the impact of the wage freeze. Shortages of foreign currency continue to affect the importation of critical food reserves with reports that 36 000 tones of wheat is stuck at Beira.

The country’s biggest baker, Lobels Bread is reported to be facing operational problems. Bakers Inn, a subsidiary of Innscor is also to lay off 875 workers as a result of wheat shortages. This will cause bread shortages to worsen.

At the moment, the shortages can only be averted by a ‘five loaves and two fish’ miracle. As expected, outside devaluation, there were no major policy shifts in the supplementary budget. The challenge was to balance economic regeneration, address policy conflicts, curb inflation and attend to price distortions when the government’s own coffers are dry. With every sector in distress, the minister was between a rock and a hard place.

STOCK MARKET UPDATE

The market closed the week on Friday on a high. After firming 7.77% on Thursday, the industrial index surged 12.43 % closing the week at 39 517 679.39 points. The market seems to have been spurred by strong financial results, the easing of price controls and the salary and wage freeze, which is likely to improve company earnings.

Old Mutual led the gains on Friday rising by 26. 05% to $750 000 on the back of the plummeting of the Zimbabwe dollar against major currencies on the illegal parallel market. FBCH was up 35.9% at $14 000 after reporting a 16 189% rise in after tax profit. Strong results especially from financial stocks have spurred the market significantly. Most banks have reported bumper profits based on significant increases in non-interest income.

FIGURE 1: INDUSTRIAL INDEX

Source: Coronation Advisory

For the six months to 30 June 2007 in after tax figures, ABCH was leading the pack at Z$893 billion, followed by ZB Bank at Z$814 billion, CBZ, Z$705 billion, ReNaissance, Z$585 billion, and FBCH Z$432 billion. Crisis, what crisis? At these profit levels, the banking sector remains the most profitable in the country.

The biggest gains were recorded on Monday opening the week bullish with gains on all counters with the exception of four. The benchmark index romped 13.26% to close at 44,757,994.37. The biggest surprise was in the mining index which gained 13.26 % on Monday and 4.1% on Tuesday to close at a record 28 535 618.64 points. The index cooled off on Wednesday putting on a significant 3.76 % ahead of the supplementary budget with investors exercising caution.

TABLE 1: ADVANCES & DECLINES

MOVERS			SHAKERS
Counter	5/09/07	% Change	Counter	5/09/07	% Change
Cottco	30 000	114.29%	Borders	22 000	12.0%
Truworths	1 600	88.24%	Radar	24 000	11.11%
Mash	3 500	84.21%	Zimpapers	700	6.67%
Nicoz	700	84.21%	KFHL	38 000	5.0%

Source: Coronation Advisory

STOCK MARKET OUTLOOK

The financial wobbles of the previous weeks appear to have been replaced by a continued rally backed by heavy weights such as Old Mutual which rose 91.31% from Z$390 000 on August 24 to Z$750 000 on August 31. The psychological contagion effect induced by price controls seems to have eased. Now that the budget has come and gone, with the Monetary Policy outstanding, we recommend investors to HOLD, pending further analysis of the supplementary and how it will affect your portfolio.

Old Mutual shares for Diaspora Investors

Last week we recommended Old Mutual shares for the risk averse investors especially those in the diaspora worried about the performance of their portfolios against major currencies. Blue chip counters such as OM, PPC, Innscor, Delta and Meikles are important in balancing and stabilising portfolios in adverse investment conditions. Since OM shares are listed in Zimbabwe and in London, the ratio of its Zimbabwean and British stock price is always considered a good proxy for the true Z$/ Sterling exchange rate.

The OM share price often tracks the parallel exchange rate thus providing a foreign currency hedge and preserving the value of your investment. This is the basis upon which analysts have derived the Old Mutual Implied Rate (OMIR) a technical way of calculating the prevailing parallel market rate. A similar method is used to calculate the exchange rate for the Venezuelan Bolivar, which has also been fixed by the government since 2003. In this case, the proxy used is the relative price of shares in CANTV, a Venezuelan telecom company that is listed in Caracas and New York.

Based on their duality, OM shares are also transferable between exchanges. In terms of performance however, the share price’s yield to date at 7 826.8% has only ‘just’ managed to match the inflation rate at 7 634.8%, compare that to its peer Fidelity, with a YTD of 65 417.2%. The most difficult choice for any investor is whether to preserve your capital or throw the dice and be speculative. Whatever the case, there are counters of the ZSE capable of matching inflation and preserve value in US$ terms.

COMPANY NEWS

Metropolitan Bank – Met Bank, one of the smallest commercial banks in Zimbabwe was reportedly been taken over in May by a Mauritius-based company, Loita Capital Partners International. Loita took up a 60 % controlling equity in a controversial acquisition marred by allegations of bribery and underpricing.

On its website, the company disclosed that in 2006, it arranged US$50 million credit facility for the Reserve Bank of Zimbabwe. The company is also said to be availing another US$50 million revolving facility for the importation of farm inputs, grain and fuel. The company has operations in South Africa, Angola, Kenya, Malawi, Mauritius, Nigeria, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.

Premier/ CFX – Another controversial tie-up for CFX after the Century Bank merger which forced the former into the wilderness! The departure of the founder and CEO of Premier, Exodus Makumbe, amidst reports of Premier having taken over 26% of CFX, points more at shareholder power play than forensic irregularities.

Premier Finance Group’s 26 % in CFX represents 1,193,312,647 shares making it the biggest shareholder. The second biggest shareholder is Allied Financial Services, which holds 17.03 % in CFX. Allied Financial Service is a special Purpose Vehicle established by the central bank to take up shareholding in the Troubled banks after the 2004 financial crisis. The market seems to have an affinity for banks. Tired and bruised from running battles with regulators, banks are vulnerable to takeovers, NMB, Met Bank, CFX, Premier are examples. The market however, hopes that the marriages are not incestuous, with rumours of powerful investors taking the banks as ‘small houses’ with the lure of ‘filthy lucre’ knowing too well they cant publicly marry them.

Cottco/Olivine deal – After months of negotiation, Cottco has acquired a 51 percent in ‘super refined’ Olivine in a deal brokered by Industrial Development Corporation (IDC). The transaction is reported to be valued at US$6,8 million. Depending on who you talk to, the deal is touted as either a disinvestment by the U.S food giant H.J Heinz Company listed on the NYSE and famous for Heinz Ketchup or one of the first major deal involving the takeover of a firm by the government on the back of the indegenisation bill. The company is ironically one of the first foreign investors in Zimbabwe after independence.

EXCHANGE RATES

Wheat payments are likely to put further strain on foreign currency requirements with reports that 36 000 tonnes of wheat is stuck in Beira owing to foreign currency shortages. Food security issues and the increased requirement for imports will continue to drive rates up.

FIGURE 2: EXCHANGE RATES

Source: Coronation Advisory

Parallel Market rates firmed marginally from Z$490 000 to the GBP on the 31 of August to Z$525 000/530 000 by the close of this week. In tandem with the rest of the market, rates have also stabilised awaiting the supplementary budget. The devaluation of the Zimbabwe dollar by the Minister may see rates correcting on the parallel market to reflect the adjusted value.