Royal Bank

Imminent 2004 National Budget casts uncertainty cloud over equities market

THERE has been a distinct lull on the local bourse in the past few weeks. The market has come off from the bull-run highs of 754 604 points a

t the end of August to the current 618 000 points as of last Friday and is fast tracking the 500 000-point mark. Investors have adopted a wait-and-see attitude.

It seems the whole market consciousness is transfixed upon that magical moment when the Minister of Finance and Economic Development Herbert Murerwa announces the national Budget for 2004.

Investors are wary of any nasty surprises that may be contained therein given the government’s proclivity for voodoo economics. This has resulted in most investors cashing out of the equities market and taking a sideline stance for the moment.

History repeats itself: looking back to last year – 2002, the budget had a damaging effect on the equities market.

The industrial index plummeted from highs of around 122 698 points and lost a third of it’s value to around 93 231 points just two weeks after the budget announcement.

This was on the back of the stringent forex requirements, that exporters were to remit all export proceeds to the RBZ, 50% of which would be converted at the then official rate of $55:US$1 and the remainder would be held to the order of the exporter for usage according to a priority list.

Investors who remember this bleak time in ZSE history, have thus opted to exit the market until they have gauged which way the wind is blowing. Once bitten twice shy!

It is impossible to predict exactly which type of “bad news” would spell doom and gloom, but there exists a wide spectrum of issues that may be the source of consternation to investors.

The reintroduction of “sanity to pricing structures” also known as price controls weighs heavily on industry.

This would have a dampening effect on earnings of counters who would be affected by blanket price controls such as CFI, Circem, Colcom, Innscor, Natfoods, OK Zimbabwe and ZSR to name a few. Not to mention the downstream effects of price controls such as a return to the shortages of basic commodities and burgeoning of the black market for such commodities.

The other pressing question is that of whether the devaluation question will be addressed in the budget.

For political reasons it is unlikely that the authorities will devalue even though under the New Economic Revival Plan, devaluation has been imminent for some time now.

On the foreign currency front, rather than devaluation, one may expect tighter controls or even levies on forex earners, as has already been evidenced by the increase of powers that enable RBZ inspectors to conduct spot inspections on any financial institutions under the Promotion of Banking Transactions Regulations 2003.

The absence of devaluation coupled with stringent foreign exchange control measures or levies in the budget will affect export counters such as Interfresh, TZI, Cottco, Ariston, ART and financial counters that trade in forex “derivatives”.

In addition, speculation is rife that the authorities will advocate for the levying of duty on luxury items in foreign currency.

All these measures may be promulgated in the budget in a bid to address external arrears, which have ballooned to US$1,6 billion.

The biggest blow to the equities market would come from an interest rate policy that would advocate for an interest rate increase.

There are few indications that the authorities may go this route. In the past few weeks, mixed signals have been sent to the market.

The central bank recently cut the premium placed on the Repo rate to 5% from 20% for secured money and for unsecured money to 10% from 40%.

However, indications on the market have been that the RBZ has not been giving accommodation to financial institutions, which amounts to the cut in the Repo rate being meaningless.

In reality, interest rates have been under upward pressure as the money market has been in a deficit position for most of the month and will likely continue to be short in the foreseeable future.

However, the official stance is to try and keep interest rates low so as to enable government to service its ballooning domestic debt.

In our opinion, the current apathetic sentiment represents an opportunity to buy for those seeking medium term investment.

Certain counters look very attractive on a P/E basis at the moment including TZI, Turnall, NMB, and Kingdom.

For those already in the market and who had invested throughout the bull’s stampede, this can also be a period of cashing out of the market if one is in a profit position.

The thorny issue rests with those who bought into the market at very high levels at the peak of the bull-run and have now seen their investments lose value.

Our opinion regarding those investors, is that they remain exposed in the stock market, as we firmly believe that in the medium term, there should be a rally.

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