16 January 2006

Zimbabwe: Negative Returns, Inflation Push Stock Prices Up


Harare — LOW money market rates coupled with a higher December inflation figure buoyed the equities last week to higher levels nearing the 30 million point mark.

The industrial index powered on 28 percent in the first four trading days while minings added more than 9 percent in the same period.

Negative real returns on the money market are pushing investors out of the fixed returns market to find succour in the stocks which is the only vehicle awarding above inflation returns.

Inflation has been the major driver of stock prices on the market as witnessed in the last quarter of 2005.

The last quarter of the stock market year marked a departure from previous trends as it traded firmer for the greater part of the period.

Inflation continued on an upward spiral, further widening the gap with money market rates. Negative returns on the money market drove investors to the stock market, exacerbating the bullish trend on the ZSE.

Investors were also given impetus by anticipated further rises in the inflation rate. Other investors were taking positions ahead of the December reporting season, especially in counters they believed would release very good earnings and held high prospects.

The key industrial index moved by 199 percent in the period under review to close the fourth quarter at 18 483 883,97 while the mining index went up by 665 percent to close the quarter at 6 450 153,38.

Monthly movements in the industrial index were 105 percent, 13 percent and 15 percent for October, November and December respectively.

Seventy-three counters gained during the quarter, one counter went down while five counters remain suspended from trading on the stock market.

With the reporting season for December interim and final results are just around the corner, I believe that in all probability this market demand will be sustained, albeit with some minor dips on profit-taking.

The scrapping of stamp duty with effect from January 1 is a plus for the stock market investors as it means lower transaction costs. Central bank governor Dr Gideon Gono is also expected to announce his Fourth Quarter Monetary Policy Review any time this month. That will also have a bearing on the direction the interest rates and inflation rate will take.

I would also expect the stock market to be quite firm driven by financial counters, and exporters as well as the blue chip counters that serve as a currency hedge such as Old Mutual. Investors should continue to keep a close eye ont the interest rate situation and take advantage on any temporary lagging of rates behind inflation.

Other analysts said some of the key factors to consider in stock selection in the first quarter of 2006 will be the reporting period, exporting counters, financials, cash-rich businesses and currency hedge counters.

On the international markets, the United States' Wall Street was indicated firmer on Monday, after gains were recorded in General Motors.

The blue chip Dow Jones Industrial average edged up 0,48 percent to close at 11 011,90 points, the Nasdaq Composite rose by 0,57 percent to settle at 2 318,69 points and the Standard and Poor's 500 Index finished 0,37 percent firmer at 1 290,15 points.

European stocks were indicated weaker in morning trade, amid profit-taking by most investors, albeit mergers and acquisitions activity kept buying interest alive.

The London FTSE 100 shed 0,14 percent to trade at 5 723,30 points and the Frankfurt Xetra Dax was 0,32 percent weaker at 5 519,61 points.

Asian stocks fell from their highest in almost 10 years led by the Japanese banks, amid concern that they will follow Sumitomo Mitsui Financial Group in selling shares to repay funds received in government bailouts. The Nikkei 225 average eased 1,85 percent to end at 16 124,35 points. In South Africa, the JSE All-Share Index fell by 0,28 percent to finish at 18 503,07 points.

On Wednesday Technology stocks pushed up Wall Street as investors shrugged off bad news from a second Dow constituent company in three days.

The blue chip Dow Jones Industrial average edged up 0,29 percent to trade at 11 403,44 points, the Nasdaq Composite was up by 0,48 percent to close at 2 331,36 points and the Standard and Poor's 500 Index added 0,35 percent to settle at 1 294,18 points.

European bourses were indicated mixed, as energy stocks were boosted by higher oil prices but held in check by fixed-line operators after a revenue warning from France Telecom. The London FTSE 100 traded 0,11 percent firmer at 5 737,80 points while the Frankfurt Xetra Dax finished 0,26 percent down to 5 518,43 points.

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