Weekly Market Commentary
Keep your eye on the ball!
The equities market traded sideways during the week ending 20 June 2006 reflecting lack of real direction on the bourse; however, by close of week, bullish sentiments characterized trading. For the week, the industrial index gained 4% to close at 45 468 230.77, while the mining index put on 8% to finish the week at 14 891 645.32 points. The top performers during the week included Pioneer, Colcom, Dawn and PPC up 63%, 25%, 22% and 21% to close the week at $1300, $25000, $3300 and $14.5 million respectively. In Minings, Rio Tinto led the movers by gaining 13% to close at a new high of.$1.1 million. Major losses were however recorded in NTS, Truworths and Meditech down 29%, 27% and 26% to close at $5000, $5100 and $350 respectively .While factors such as high inflation outlook, depreciating currency and excess liquidity on the money market points towards bullish sentiments on the stock market, high 91 day treasury bills rates and 1 year CPI linked bills seem to have lured investors to the money market. Developments on the money market are expected to continue to determine direction of the stock market at least in the short to medium term. We expect a further weakening of the stock market by end of week and early next week (week starting 26 June 2006) due to quarterly tax payments due that may result in deficit on the money market, hence pushing deposit rates up. In the outlook, we expect the stock market to revalue factoring in inflation, local currency depreciation organic growth in selected counters. The exchange rate hasn’t moved from January 2006 to date and we expect an exchange rate review in July when the central bank presents mid term monetary policy review. The prevailing high interest rates have led to short term bearish market mood on the bourse, hence we advise investors to take a long term view on the stock market. Adjustments in commodity prices will continue in line with inflation and exchange rate, hence, long term investors should take advantages of the bearish conditions currently obtaining to accumulate quality counters which can survive the current economic storm. Consumer oriented, fungible and cash rich counters remain lucrative. Below is the movers and shakers table for the week.
The market was in deficit during the week closed on 20 June 2006 at $1.2 trillion down and forecasted at $ 1.1 trillion down mainly due to lack of significant treasury bills maturities. As a result, deposit rates surged from previous week with short end rates closing at an average rate of 150% from 65%. Thirty and sixty day deposits improved to 200% and 250% from 160% and 230% respectively whilst ninety day deposits remained at previous week levels, that is 450%. The central bank has continued with the policy of issuing a combination of 91 day Treasury bills and one year CPI linked paper in order to keep the money market in short position. This has seen the 91 day Treasury bill rate increase to 510% per annum from 506% last week. We expect the market to trade in deficit up to early July due to quarterly corporate tax payment due by end of this month; hence interest rates should improve from current levels. The central bank introduced new monetary policy measures during the week. Statutory reserve requirement for banks were revised downwards as follows; Commercial and Merchant Banks from 60% to 50% on demand/call funds and 45% to 40% on savings accounts. For Discount Houses, the ratio decreased from 45% to 40% while Building Societies had their statutory reserves revised from 45% to 40% and Finance Houses from 30% to 25%. The compulsory two year paper on commercial banks in surplus was discontinued and replaced with thirty day certificate of deposit at no interest. Outstanding two year special treasury bills that remain on the books of banks have had their interest rate revised upwards to 375% from 200%. The adjustment in the statutory reserves and interest rate on the two year paper is a reprieve to financial institutions as these will increase interest income for the banks. The interest on the two year paper will be of great advantage to the big banks that had a significant chunk of their money converted to the long paper. The additional fortuitous income for the banks would be reflected in the first half year results for 2006 for most banks. Corporate money market investors should buy 91 day treasury bills direct from the Central Bank to maximize on yield as opposed to buying treasury bills in the secondary market. In addition, investors should take advantage of the one year CPI linked papers 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. 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, upward adjustments in international fuel prices and general costs of amenities. We foresee the inflation figures closing the year well above the Central Bank’s projections of between 220%-230%. Recent fuel price adjustments to between $400 000 and $600 000 per litre from average price of $340 00 last week will result in even higher prices of commodities. Of late, ZESA, PTC and mobile telecommunication service providers adjusted tariffs by more than 100%. This point to even higher costs of goods and services. In periods of hyperinflation, monetary assets should be confined to levels necessary for liquidity and other statutory provisions while large proportions should be invested in real assets to preserve value. We therefore advise investors to skew much of their portfolios in defensive real assets that will be able to weather the inflationary pressure. Such instruments are equities and properties. In addition, the CPI linked bond is another option to hedge against inflation.
The local currency is unchanged from last week on the formal market but is reported to have continued to trade at a premium on the parallel market. The inter bank exchange rate remained at $101 195.54 whilst the official exchange rate remained at $30 000 to the US dollar. With the current supply rigidity on the foreign currency market, we expect the parallel rate to continue depreciating. The widening disparity between the official and parallel exchange rate has maintained arbitrage opportunities hence fueling speculative practices. The interbank exchange rate system should be revised to enable the exchange rate to move in tandem with market forces. Such a development will alleviate the plight of exporters who despite a spiral in overheads have continued to receive static revenue. In the absence of market-determined exchange rate, investors should increase assets that revalue in line with international parity exchange rates. Such assets could be currency hedge shares and property.
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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