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published-Mon 07 Aug 2006

Weekly Market Commentary

Keep your eye on the ball!

Stock Market

A full bull run was experienced during the week ending 02 August 2006. The slashing of 91 day Treasury bill rate from 510% to 360% in the previous week set the tone for the equities market. Traders started to take positions on the bourse ahead of the mid term monetary policy that was finally presented on 31 July 2006. In addition, the lowering of the bank rate to 300% and 350% for secured and unsecured lending and failure by the central bank hold a Treasury bill tender on Monday resulted in demand for equities. The governor reintroduced a low interest rate regime again; hence, investors will not be able to get real rates on the money market. This has caused the stock market to be bullish resulting in a rally across the board to give an average growth of 62% from previous week.  However, top gains were from penny stocks that had not moved from February as investors had predominantly preferred quality counters. The industrial index gained by a massive 64% to close at an all time high of 118 421.64 points from 72 223.74 points. In the same mode, the mining index went up by 67% to close at 43 962.87 points from 26 334.94 points. Major gains were recorded in CFX (260%), Meditech (233%), Ariston (150%) and Pelhams (150%) end the week at $1.8, $1, $25 and $0.7 from $0.50, $0.30, $10 and $0.28 respectively. Out of the 75 listed counters, 74 went up, Pioneer remained static while no counter traded into deficit.  A renewed interest in exporting counters due to exchange rate devaluation, retailers and banks was seen. Banks regained the lost luster as the reversal of a tight monetary stance by the central bank improves viability and profitability prospects in the sector. Going forward, the heavy treasury bills maturity, low interest rate regime; high inflation outlook will continue to play up the stock market as investors are likely to be deprived of choice of markets where real rates are obtainable. Profit taking tendencies are expected to come into the market towards end of week (4 August) and early next week as speculators crystallize gains. However, we expect the market to quickly find support to remain predominantly a buyers market as investors deprived of alternatives comes to the bourse for real returns. If precedence is to guide us, a policy shift by the central bank to dampen activities on the bourse can not be ruled out given that asset bubbles are inflationary. Investors should capitalize on the bull run to lock profits especially those who entered the market before the upswing. Long term investors should continue to buy into weakness in value counters. The export sector incentives and the devaluation recently announced will revalue export counters. Investors should consider buying into second tier stock that are likely to revalue given that quite a number of blue chips are becoming expensive, hence attention will be on the second tier stocks.   Below is the movers and shakers summary for the week under review;

Movers 25-Jul-06 1-Aug-06 % Return
CFX                 0.50                  1.80 260%
MEDTECH                 0.30                  1.00 233%
ARISTON               10.00                25.00 150%
PELHAMS                 0.28                  0.70 150%
KINGDOM                 6.20                15.00 142%
WILLDALE                 0.30                  0.70 133%
BARCLAYS                 4.30                  9.45 120%
NTS                 6.00                13.00 117%
INTERFRESH                 3.30                  7.00 112%
ZIMNAT LION                 0.60                  1.25 108%
Indeces      
Industrial        72,223.74       118,421.64 64%
Mining        26,334.94         43,962.87 67%

Money Market

The market closed on 1 August at $7.9 billion down and was forecasted at $5.7 billion down behind a backdrop of little Treasury bill maturities. However, the rates remained low given that the central bank issued 91 day treasury bills at 200% by end of week, hence putting a ceiling on deposit rates. Rates remained depressed as a result with most banks not quoting on the short end of the market. 30 day deposit rates averaged 80% and 60 days deposits averaged 100% by close of week. 91 day deposits closed at 180% reflecting the rate obtaining on the 91 day Treasury bill paper. For the rest of the week to Friday 4 August, the market expects maturities of $6.8 billion. However, we expect rates to remain in the same range as the central bank is likely to issue further tenders to take out any surpluses in the market. The central bank announced a low interest rate policy, shifting from the high interest regime that dominated the first half of the year. High interest rates had become unsustainable given its implications on domestic debt including the crowding out effect to productive sector credit market. Accommodation rates were reduced to 300% and 350% for secured and unsecured borrowing respectively from a high of 800% and 900% respectively. This should see a corresponding reduction in minimum lending rates. Statutory reserves were further reduced to 40% for demand deposits and 30% for time deposits. In addition, the 30 day deposit at zero percent for all banks in surplus that replaced the compulsory 2 year paper (at 200%) for banks in surplus was further reduced to 7 days. All the above measures will result in easier liquidity conditions on the money market. Adding heavy treasury bills maturity (August-$51.66 billion and September- $86.55 billion) to the above entails further softening of interest rates on the money market in the short to medium term. The reduction in borrowing rates will enhance productive borrowing especially for agriculture. Low interest rates on the money market will attract investors to the stock market further fueling a bullish trend. Investors should therefore reduce exposure in the money market and direct more funds in instruments that have capacity to give real returns like   equities. 

Inflation

Inflation statistics for the month of June stood at 1 184% year on year showing a decline of 9.5 percentage points from year on year inflation for May that stood at 1 193.5%. The central bank through the mid term monetary policy statement, envisages inflation to trend down progressively to single digit by December 2008. While we recon that the phasing out of the old bearer cheques in favor of the new family of bearer cheques that have been rebased does not reduce inflation, it will reduce black market activities and speculation in the short term. However, we remain skeptical with the governor’s forecast of the overall improvement in the economy and single digit inflation by end of 2008. Low capacity utilization, poor foreign currency inflows, mediocre export sector performance, high money supply growth, expansionary fiscal policy and external shocks may continue to discount the governor’s forecasts going forward. Inflation is likely to remain high; hence, investors should therefore increase exposure in inflation hedge investment instruments.

Foreign currency

The interbank exchange rate system (volume based) was replaced by a ‘flexible’ exchange rate framework that will be set from time to time by  the “Exchange Rate impact Board” comprised of exporters, importers, Consumer council NEDPP amongst other groups. The local currency was devalued by 59.5% to Z$250 from $101. 20 to improve exporter viability. However, the devaluation falls short of market expectations and does not compare favourably to the Old Mutual implied rate of Z$747 to the US Dollar. Such a disparity maintains incentives for traders to prefer the informal market, hence foreign currency inflows in to the official channels will remain low in the short to medium term. However the devaluation may see stability of the parallel market in the short term. We are likely to see price adjustments to factor the devaluation though the increase could be minimal given that current prices are already pegged at the parallel market rates. The devaluation instantaneously increased our foreign debt and import bill on energy imports, fuel and other critical goods, while our export earnings may not respond as quickly as possible given that our exports are seasonal and are to a large extend inelastic. In light of the fact that the exchange rate will be reviewed regularly going forward, exporting counters are likely to record high earnings, hence, investors should consider buying into this sector. 

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.

If you have any comments or queries arising from this report, please contact Rashid Mudala, Herbert Chibika or Edwin Potsiwa on Harare 886000-39. You can also email us on the following addresses. rmudala@fmlzim.com, hchibika@fmlzim.com or epotsiwa@fmlzim.com. You are free to distribute this report to any of your clients.