Weekly Market Commentary
Keep your eye on the ball!
The stock market continued to trade in the positive, buoyed by gains recorded in large capitalized counters such as Old Mutual, PPC, Econet and Meikles. The surge in the heavy weights could be in line with the movement in exchange rate. The rally also resulted in medium capitalized counters revaluing as investors took positions ahead of looming June results coupled by expectations of an even higher inflation figure for the month of June. The industrial index broke the 55 million point mark to close the week ending 6 June 9% higher at 57,5 million points from 52.9 million points last week. Like wise, the mining index gained 6% to close at 16.49 million points from 15.57 million points spurred by a 25% surge in Bindura to close at $20 000 from $16 000. Major gains were recorded in among other counters CFI, Dairibord, ABCH and Powerspeed up 65%, 43%, 36% and 27% to finish the week at $14000, $50000, $38000 and $2800 respectively. Major losses were however recorded in General Beltings, FBCH, Falgold and Zimre down 25%, 20%, 20% and 19% to finish at $1200, $4000, $4000 and $5000 respectively. Overall, 34 counters traded in the positive, 30 counters lost and 12 counters traded at last week levels. Trading in the short term is likely to be mixed as the market awaits the mid term monetary and fiscal policies. Looking ahead, we believe the stock market will reward investors with a long term investment horizon as the bourse factors in inflation, movement in the exchange rate, excess money market conditions and fundamental growth in selected counters. In light of the turbulent economic environment, we recommend investors to buy into quality counters that have strong balance sheets, cash rich and have a consistent record of profitability. Table I below shows the major movers and shakers for the week under review.
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The money market opened the week in deficit as a result 91 day ZTBOMO and 365 day CPI linked tender payment. However, heavy treasury bills during the week caused the market to trade in surplus. The market closed the week on 6 July at $600 billion up and was forecasted at $3 trillion up. As a result, deposit rates traded softer from last week levels with short end deposit averaging 150% by close of week from 250% last week. 30 days deposits were quoted at 200% compared to 300% whilst 60 days and 90 days investments averaged 260% and 450% from 350% and 450% respectively. Rates are expected to improve by early next week due to statutory reserve payment by banks. A total of $5.14 trillion is expected to come into the market through treasury bills maturities, however, liquidity levels will continue to be determined by amount of Treasury bill tenders that the central bank may issue from time to time. We expect the market to square up and then trade in surplus by week end as civil service salaries start to come through. The market expects a high inflation figure for the month of June and this may result in a further hike of the 91 day Treasury bill paper from the current 510% per annum in line with the central bank’s tight monetary policy framework. Such a move will automatically increase long end deposit rates. However, short term deposit rates will remain a function of day to day liquidity position. The month of July has about $45 trillion in maturity and more than $30 trillion is yet to mature, hence, we expect short end deposit rates to remain subdued for the rest of the month. Investors should therefore place funds on longer tenors to avoid rollovers at poor yields in a surplus market. The central bank further reduced statutory reserves for deposit takers by a further 2.5% percentage points. To date, the effective statutory reserves are at 37.5% from 45% on time deposits and 47.5% from 60% on demand deposits. This will improve bank’s liquidity position and will reflect in more income for the sector. We continue to advise money market investors to take advantage of 91 day Treasury bill and 365 day CPI linked tenders that may be floated by the central bank.
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 price and ultimate market wide prices of goods and services. The inflation pressures are set to remain high during the rest of the year if there is no significant improvement in our foreign currency situation to stabilize the exchange rate. Low productivity as shown by low capacity utilization and ever increasing government expenditures especially through civil service salaries and subsidies entails a worsening inflationary outlook. The international fuel prices were reported to have reached US$75 per barrel by end of week. Such developments have an adverse impact on non oil producing economies like Zimbabwe, as this will translate into corresponding adjustments of oil prices on the market and obviously a market wide rise in prices of both good and amenities. 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 paper is another option to hedge against inflation.
The local unit remained unchanged against the US Dollar on the interbank market trading at $101 195.54 during the week under review. However, on the parallel market, the US dollar is reported to have remained at levels above $390 000. This point to the fact that our currency have remained overvalued on the official market availing arbitrage opportunities for rent seekers. The exchange rate system now requires a policy shift from the fixed exchange rate regime to a fair value system to water down speculation, encourage inflow of foreign currency in the official channels and to give reprieve to exporters. We expect the central bank to effect some changes in the current interbank system in the mid term monetary policy review that is expected to be tabled during the week ending 14 July. However, the exchange rate may not stabilize in the short end even if a market determined exchange rate is adopted because of supply rigidities. Investors are therefore advised to invest in assets that at least revalue in line with international parity exchange rate like currency hedge counters and properties
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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