Weekly Market Commentary
Keep your eye on the ball!
Interest rates dropped during the week ending 09 June 2006 from the previous week levels mainly due to heavy treasury bills maturities during the week. The week ended on Friday with a market position of $2 trillion up and the forecast stood at $2.1 trillion down. As a result, money market rates softened from the previous week with short end rates dropping from 300% in the previous week to 85%. Thirty and sixty day deposit ended the week at 140% and 190% from 300% and 350% respectively. Ninety day deposit rate declined marginally to 410% from an average rate of 420% in the previous week. The Central bank continued to issue ninety one day treasury bills at 500% and one year CPI linked paper to mop out excess liquidity. Soft rates are set to persist in the short end due to heavy treasury bills maturities ( $12 trillion is expected in the week commencing 12 June 2006). In addition, cash injections from civil service salaries will start to reflect in the market during the week. The drop of interest rates will affect short term money market investors especially in light of the higher inflation figures for the month of May 2006 at 1193.5% year on year. Generally, the low interest rates on the money market should result in a rally on the stock market; hence investors could buy into equities when the stock market is still cheap. We advise money market investors to choose longer tenors as we are likely to witness banks avoiding short term deposits as the market trade in surplus. Long term money market investors can take advantage of the one year CPI linked paper for long term real returns.
The inflation statistics for the month of May 2006 were announced at 1 193.5% year on year and 28% month on month. This was a 150 percentage points up on the April 2006 year on year inflation of 1 042.9% and 6 percentage points on the April’s month on month inflation of 21.1%. The figures show that on average, goods and services have increased by close to 12 times from May last year to date, accordingly, by 28% from April 2006 to May 2006. Items that registered the highest increase in prices were medical services which went up by 11 029.9%, postal services went up by 5 180.4% and hairdressing costs went up by 4 665.6%. On a month on month basis, paramedical services topped the list with a 7 500.7% followed by medical services that went up by 1 042.7%. The inflation numbers are set to remain high during the rest of the year on the backdrop of high money supply growth due to high government expenditure and treasury bills maturities, foreign currency shortages and general costs of amenities. Price of fuel has increased of late to between $300 000 and $340 000 per litre in line with the recent depreciation of the local currency on the parallel market and international oil prices. This will result in a round of price increases in the economy and will filter in inflation statistics for June. Recent tariff adjustments by telecommunication industry and ZESA with effect from June 2006 will filter into overheads for organizations. Such a development will result in a round of a market wide price increases and this will result in even high inflation figures. We foresee the inflation figures closing the year well above the Central Bank’s projections of between 220%-230%. Cost of doing business will continue to increase during the year as a result. We continue to advise investors to remain overweight in inflation hedge investment vehicles like properties, equities and 1 year CPI linked treasury bills for medium to long term real returns.
The local currency which is reported to have depreciated considerably on the parallel market against major currencies has remained at $101 195.54 to the US dollar on the official inter bank market. The local currency depreciated by a marginal 0.28% against the rand to $15 015.85 from $14 973.52 in the previous week. The rift between the official and parallel market exchange rate seem to be widening hence availing arbitrage opportunities. The resultant effect will be that traders will be tempted to sideline official channels. This points to the fact that the fixed exchange rate system needs to be adjusted towards market determined rate to give reprieve to exporters whose revenue have remained static despite a sharp increase in input and production costs. Investors should increase exposure in assets that factors in devaluation of the local currency using international parity. These could be equities especially the currency hedges and property market for high net worth investors.
This article is published for general investment advice and it must be noted that the price of equities and the income derived from them can rise as well as fall. Neither First Mutual Life nor the author shall be held liable for any losses as a result of the investment advice contained in this article. It is important that specific investment advice is sought as each investor’s investment will be dependent on their circumstances.
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