Weekly Market Commentary
Keep your eye on the ball!
The industrial index continued on its upward strip, gaining a further 13% to close the week ending 29 June 2006 at a new all time high of 52 918 064.28 points. On the contrary, the mining index closed 6% lower at 15 565 095.88 points on the back of poor offers by all counters across the mining index with Bindura leading the peck by shading 20% to close at $16 000 followed by Hwange losing 10% to close at $18 000. Confidence in the mining sector is still low given the intention by the government to acquire a minimum of 50% in all mining counters. In addition, the fixed exchange rate regime has posed viability challenges to exporters hence; investors seemed to have discounted the offerings by the mining counters in light of the challenges currently obtaining in the sector. In industrials, major gains were recorded in Afdis (85%), Seedco (72%), General Beltings (60%) and Gulliver (60%) to close the week at $37 000, $43 000, $1 600 and $16 000 respectively. Major loses were however recorded in Celsys (-18%), Pelhams (-14%), ZSR (-14%) and Powerspeed (-12%). Overall, of the 76 listed counters, 45 went up (59%), 16 went down (21%) and 15 traded unchanged (20%). In the short end of the market, we expect the stock market to trade sideways as the market awaits the forth coming mid term monetary policy and fiscal policy statements during the month of July. However, in the medium to long end of the market, we believe the stock market is poised for a strong rally behind a background of expected high inflation outlook, forecasted excess liquidity on the money market due to treasury bills maturities and expected weakening of the local currency that is expected to re value the stock market. Whilst inflation and parallel market exchange rate has moved significantly in the first half of 2006, there was no corresponding revaluation of the stock market, mainly because of the high interest rates that were maintained on the money market in light of the tight monetary stands adopted by the central bank. This has caused the bourse to be highly undervalued and we encourage investors to buy into quality counters for long to medium term positions. The top movers and shakers of the week under review are tabulated below;
The money market closed on Thursday, 29 June 2006 at $3.4 trillion in deficit and was forecasted at $3.7 trillion down. The central bank continued to issue 91 day treasury bills at 510% and CPI linked 365 day paper to mop out excess liquidity. In addition, by week end, the central bank issued 91 days ZTBOMO and 365 days CPI plus 2% bond to the public. This was to take excess liquidity from non banking institutions and individual investors as the papers were open to the public. This was the missing link previously given that whilst the tenders on a daily basis are confined mainly to banks and other corporate bodies, they are closed to individual investors. This has resulted in people having excess cash that was then used to trade on unofficial market resulting in speculation. Deposit rates firmed from last week levels due to deficit conditions (caused by corporate tax payment on 25 June 2005) during the week. Short end deposits closed at 250% from an average rate of 150% last week. 30, 60 and 90 days deposits averaged 300%, 350% and 400% from 200%, 250% and 400% respectively. In the coming week, the market expects an injection of funds that is close to $15 trillion in the form of treasury bills maturities. We expect softening of deposit rates from current levels, however, we also expect the central bank to counter the inflows by issuing a combination of both 91 day treasury bills and I year CPI linked paper. The central bank may issue more ZTBOMO tenders during the week. The central bank introduced new monetary policy measures last 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 downwards adjustment in the statutory reserves will not result in cash injection in the market given that the funds unlocked from the reduction in reserve ratios will be converted to the CPI- linked 365 day treasury bill. 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%. We expect even higher statistics for the month of June given that the Zimbabwean dollar depreciated significantly on the parallel market resulting in a spike in fuel prices from $250 000 per litre in May to between $400 000 and $600 000 per liter. This has resulted in rounds of price increases of goods and services. Prices of amenities have gone up that is ZESA tariffs, rent and rates, telephone charges amongst others. This point to higher inflation figures for the month of June .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. Production costs will remain high due to inflation, thereby threatening the stability of wholesale and retail prices. 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. Investors should increase exposure of their wealth in investment instruments that covers them against ravage effects of inflation. We therefore advise investors to invest in stocks for long term returns. In addition, the CPI linked bond is another option to hedge against inflation.
The Zimbabwean currency remained unchanged against the US Dollar on both the interbank ($101 195.54) market and official market ($30 000). The stagnation on the interbank market shows that volume of foreign currency traded on the official market remained a far cry from the US$5 million threshold to affect any movement of the exchange rate. However, following the movement of the greenback during the week, the Zimbabwean dollar firmed against most major trading currencies and exchanged with the rand at $13 827.36 from $14 270.98 last week. The supply side rigidity on the foreign currency market points to a continued depreciation of the exchange rate on the parallel market. This will further squeeze inflows in the official channel. We expect the central bank to revise the current fixed exchange rate regime with a view to give respite to exporters and bridge the widening gap between the two markets that is official and parallel market. 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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