allAfrica.com: Zimbabwe: Investor Prayers Answered (Page 1 of 1)

With money market perennially yielding negative real rates due to financial repression and hyperinflation on the one hand and an over-valued currency due to a fixed exchange rate policy on the other, investors had, hitherto, been locked in the volatile equities market. While the property market was available as a viable alternative, it could not be readily exploited by the average investors due to the high expenditure outlays involved. This left investors with no option but to concentrate on the volatile equities market.

Investors, that for a very long time, had suffered from a problem of very limited choices of viable and legal investment destinations, had their prayers answered when the Central Bank Governor liberalised the foreign exchange market at the end of April. With money market perennially yielding negative real rates due to financial repression and hyperinflation on the one hand and an over-valued currency due to a fixed exchange rate policy on the other, investors had, hitherto, been locked in the volatile equities market. While the property market was available as a viable alternative, it could not be readily exploited by the average investors due to the high expenditure outlays involved. This left investors with no option but to concentrate on the volatile equities market.

After abandoning his first attempt at a flexible exchange rate system (Tradable Foreign Currency Balance System) onJanuary 24 2006 and replacing it with a fixed exchange rate system (Volume-Based Exchange Rate System), the Central Bank Governor made a U-turn on April 30 and re-introduced the floating exchange rate system (Priority-Focused Twinning Arrangements). This coming of another viable, legal investment alternative has seen investors moving some of their financial assets out of the equities market into the foreign exchange market through free funds that would have been obtained through various legal ways. We expect this development to continue taking place until there is an equalisation of returns on the two markets and as long as investors have confidence that the authorities will not change the flexible exchange rate regime and revert to a fixed exchange rate one as has been the case before. The equities market could have lost even more steam had the money market been liberalised so that investors get positive real returns. Given that the government is the biggest borrower in the economy we do not see this happening as it means that the Treasury bill rate, currently pegged at 340% per annum, will have to sky-rocket to reflect the current hyperinflationary environment.

With the foreign exchange market having taken excess investment demand out of the equities market a long-term upward movement in share prices should now reflect an increase in inflation and the high demand for foreign currency.

Reflecting this development the equities market performed mixed during the week ending Wednesday (14/05/08) with the benchmark Industrial Index gaining by a marginal 2.89% to close at 107,581,665,089.80 points whilst the Mining Index retreated by 3.14% to 95,607,158,023.24 points.

Movers were led by NTS that firmed 135% to close the week at Z$4 million, followed by Phoenix and Interfresh which rose 118% and 100% to Z$12 million and Z$7 million, respectively. Other counters that gained include Edgars, Gulliver, Hunyani, Hippo, PPC and KMAL. Shakers were led by CFX which fell by 41% to close at Z$270,000, followed by Radar that lost 36% to Z$90 million. Apex shed 35% from Z$1.1 million whilst Pioneer and Cairns slipped 35% and 31%, respectively to close at Z$900,000 and Z$6 million, respectively.

Given the bleak inflation outlook and a continued strong demand for foreign currency by companies we expect the equities market to continue with its self-correction trend in the medium to long-term. The current profit-taking behaviour, therefore, is an opportunity for investors to pick some counters that are trading at a discount from their intrinsic value and also to re-structure their portfolios through prudent stock selection. Stocks with strong balance sheets, high foreign currency earning capacity and cash cows are the ones to go for as they are able to perform commendably under the current market environment.

Meanwhile, significant inflows have started to be felt on the money market emanating from tobacco sales whose selling season began during the last week of April. In light of the introduction of a flexible exchange rate system, the previously announced support price of Z$70 million against the US dollar has fallen away. All tobacco deliveries are now purchased at the going inter-bank rate. According to Tobacco Industry and Marketing Board (TIMB) the inter-bank rate which yesterday stood at Z$240 million to the US dollar, would be applied from the start of the tobacco selling season. With an estimated total of 80 million kilograms of tobacco being expected to go under the hummer this selling season, an enormous amount of funds will be dished out to farmers as their US dollar denominated sales are converted into local currency.

Reflecting the effect of these tobacco monies being pumped into the economy, the money market was forecast to close with a surplus of Z$815 trillion yesterday with civil servant salaries also expected to contribute heavily to the excess liquidity conditions. Since the announcement of these exciting measures to tobacco, money market liquidity has increased from Z$1.4 trillion on Wednesday (07/05/08) to Z$101 trillion on Friday (09/05/08). Statutory Reserve payments on Monday (12/05/08) sucked out a significant amount of liquidity resulting in the market temporarily closing short to the tune of Z$140 trillion. However, by the following day on Tuesday (13/05/08) the market was back into surplus closing up to the tune of Z$467 trillion.

High liquidity expectations are still strong in the market as a lot of funds are expected to be pumped into the market to meet various fiscal and quasi-fiscal expenditures.

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