Fungai Matura, Equities Analyst Intermarket Holdings
26 January 2004
analysis
This is the second of a two part series in which Intermarket Holdings equities analyst, Fungai Matura looks at the equity market after the announcement of the monetary policy by Governor of the Reserve Bank of Zimbabwe Dr Gideon Gono.
Introduction
The week before last, we looked at the monetary policy and assessed its thrust in general. last week we began to examine the market conditions evolving beyond the announcement of the policy, with specific focus on capital markets. Traditional money and capital markets trends are to a large extent dictated by macroeconomic fundamentals, particularly given that these have a bearing on profitability and corporate growth.
Of interest is that in Zimbabwe's case where all economic fundamentals were looking skewed, money and capital markets were operating on a business as usual mode, at least since early 2002, when a low interest rate regime was introduced, pitted within an inflationary environment. Since then, despite continuous weakening of economic fundamentals, where inflation moved to above 600 percent, stock market investments by and large continued to offer returns in excess of inflation.
Manufacturing
This sector is made up of players whose fortunes are tied to a diverse range of factors. We have net exporters whose fortunes will be driven to a large extent by the exchange rate. We also have manufacturing companies predominantly selling their products on the local market. These are more likely to be hit by the falling real disposable incomes. There is also the issue of the deteriorating national rail and road infrastructure that is likely to impact negatively on the cost of production. For individual companies, there is the issue of gearing. Where companies have taken advantage of the low interest rate regime previously in place to fund expenditure of a capital nature we might see the current relatively high rates negatively impacting on profits. While there are proposals to keep funding for manufacturing purposes kept at rates as low as 30 percent we feel not all players who need the money will be able to access funding at these rates. We however, note that some of the providers of basic commodities like housing (e.g. PGI, Turnall and Mashonaland) could continue to register growth despite the challenges. Some of the low geared exporters should also stand to benefit.
Mining
The international prices of both base and precious metals and the movement in the exchange rate are some of the key drivers of the sector going forward. Prices of both base and precious metals are expected to remain firm in 2004. Base metal prices are forecast to benefit from the strong growth prospects in China, USA and possibly Europe while demand from investors seeking a hedge against the falling US dollar and consumption demand in Asia particularly India should benefit precious metal prices.
On the local scene of concern would be the level of capital investment given the difficult condition the players in the sector have been operating under over the last few years. There are very few reports of significant capital investment particularly green field projects by the listed companies with the possible exception of Rio Tinto. However by their very nature investments in mining are long term investments and we would recommend investors with such a time horizon to consider taking advantage of the current depressed prices to gain an exposure.
Conclusion
The current activity on the market will have brought a new sense of realism on the part of investors. The era of dreaming of unrealistic fabulous riches created overnight as those that were being promised by some of the quirky fly-by-night outfits that were sprouting all over the show is coming to an end.
The tighter regulation of the financial industry should eventually realign positions in the sector, and shift business back to core activities, and hence link earnings to real productivity growth. The current state of the market is not conducive for liquidating stocks, and if anything those who can afford should seriously be considering accumulating particularly given that most of the counters are trading at their lowest values ever relative to their earnings. Buying now even for those investors who are incurring nominal losses due to their holdings would reduce their average cost.
At the risk of being strung up the nearest lamp post we believe despite the gloom and doom currently pervading the equity market now could be time to invest in quality blue chip stocks. These would be companies with strong balance sheets that have been able to grow or at least maintain volumes, have low gearing and strong corporate governance in place. These are the companies we expect to benefit from the flight to quality that is likely to intensify as the economic woes worsen.
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