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Sagit – Whither interest rates?

By Addmore Chakurira

ANALYSTS are questioning whether interest rates are going to increase any time soon.

Money market rates have r

emained depressed, with rates in the 50% to 90% region, resulting in persistent negative real interest rates. It appears as if liquidity conditions no longer have much impact on interest rates due to issuance of special Treasury Bills (TB) or their repurchase to maintain liquidity at acceptable levels. With the year-on-year inflation figure coming down, investment interest rates are anticipated to remain at current levels.

Lending rates are however likely to slow down further from the prevailing levels of around 180% per annum if the deceleration in the inflation rate is maintained in line with the Reserve Bank of Zimbabwe’s indications that they should be in the 10 to 20 percentage points above the inflation rate.

On the equities market, the reporting season is now in full swing. Results released to-date have not been inspiring, largely keeping momentum investors at bay. The majority of the results mirror the continued slowdown in the economy, with most performances shy of the average inflation figure for the comparable periods.

Talk of the week is the stupendous turnaround by Zimpapers, the performance for the six months to June 30 greatly surpassing full year 2003 performance as fruits of the restructuring filter through. Having been struggling for the past years, the group managed to turn around its fortunes with turnover going up more than 10-fold to $72,2 billion and operating margins thickening by five percentage points to a healthy 46%. The group realised a profit before tax of $10,1 billion after charging for $1,8 billion exchange losses and finance cost of $2,6 billion.

Profit after tax jumped 5 041% to $6,6 billion, with shareholders having a generous cash dividend of $2 per share – the scrip last traded at $2 a year ago in June 2003. The group is now cash positive, having operated in a cash negative position for many years, and reduced local borrowings. That said, the recent events on the equity markets have surely unsettled many investors. Large daily price movements in most counters have led to a poor state of investor sentiment.

Most expect the general market environment to remain difficult, particularly given that the operating environment remains challenging for many.

Investing can be a highly emotional experience particularly through periods of volatility. Investors should understand the “cycle of market emotions” so as to make a rational approach to maximising market fluctuations.

Generally, history tells us that turbulence does not always have to equate to negativity.

For smart investors, market lows may represent investment opportunities as opposed to reasons for retreating. It is natural, and wise, to regularly review investment choices and ensuring that those choices are still meeting the investor’s long-term goals.

The up and downs, however, may lead investors to be momentarily blinded by fears of loss because it is, after all, investors’ future financial security that’s at stake. And, in an effort to seemingly protect themselves against the uncertainty, they make rash, impulsive decisions – decisions that later may be regretted.

The current environment might enable well-managed companies to distinguish themselves from weaker or less discerning competitors and emerge significantly stronger. Equities investing is for the long-term investors keep your cool on the stock market. However, investors should learn to protect their profits, crystallise where possible and always know that it is never too late to sell a stock, run when you see the danger warnings flashing.

Trouble ahead?

Over the past three or so years, there has been a general buoyance in real estate to such an extent that getting on board the speeding real estate express is getting harder and harder. This has been driven largely by a highly leveraged speculating community, which started its own love affair with assets leading to prices reaching unprecedented levels. Over these years, assets, including real estate, have proved to be a good hedge against inflation and for speculative purposes.

Cracks have certainly started to show in the real estate and assets in general with prices having come off since the announcement of the monetary policy statement in December 2003, evidence that the domestic economy continues to struggle amid a sharp pullback in demand. There is no doubt that prices of residential property and assets in general are likely to remain high reflecting scarcity and spiraling inflation.

There is likely to be a pernicious type of asset bubble in a market dominated by very few buyers chasing the same assets exacerbated by the lack of liquidity. What goes up must come down. Going forward, the returns on these investments are unlikely to match inflation. The stock market bubble of last year is just an example.

Generally, market prices don’t necessarily reflect the “fair value” of an asset since they can be exposed to temporary periods of excess supply or demand before equilibrium is re-established. There are much greater informational barriers in real estate markets than in financial markets that are themselves hard enough to sort out. Unlike real estate markets, financial asset prices are more constantly negotiated with results communicated instantly to hundreds or thousands.

Rentals mainly for commercial property have continued to escalate despite the deplorable conditions of some of the buildings – air conditioners not working, elevators grounded for inspection for months if not years – and poor service provisions. In most instances it’s proving to be cheaper for businesses to buy their own properties out of the central business district for office use.

To occupy a floor costs around $22 million a month while decent houses which can be converted for office use are going for around $350 million.

l Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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