INVESTORS are reacting positively to last week’s mid-term fiscal policy statement and 2007 Supplementary Budget as they frantically looked for
an inflation-proof home for their investment funds.
The industrial index gained 21 505 954,67 points to reach 65 996 610,02 points on Wednesday from 44 490 653,35 points whilst the resources index shot up to 53 462 034,42 points from 28 702 535,36 during the same period.
The Minister of Finance Samuel Mumbengegwi presented a $37,1 trillion budget to be allocated to various sectors of the economy despite initial submissions of $255 trillion by the ministries.
This means that the budget has “significant” inflationary consequences despite the current price controls, a development that will force a correction in equities otherwise they will become undervalued.
Since the beginning of the year short term investors have been pocketing millions of dollars on the stock market largely due to rising inflation.
Given investors’ quest to hedge their assets against the wealth-destruction effects of inflation, the outlook for equities in the long term will depend on the degree to which the various counters are able to profitably operate in this environment of price controls. Although Mumbengegwi dismissed the $255 trillion request as “beyond government’s domestic financing capacity”, bank economists this week said government would be forced to spend more than the $37,1 trillion.
An investor who might have bought 200 British America Tobacco shares at $90 million last week on Wednesday could pocket $150 million if he had sold the same shares on Wednesday.
200 Old Mutual and ABCH shares bought during the same period at $123 million and $12 million would be sold at $160 million and $22 million respectively if sold during the same period.
During Wednesday’s afternoon trade the industrial and mining index retreated slightly, briefly reflecting profit-taking by investors as they await new information to be presented by Reserve Bank governor, Gideon Gono in his monetary policy statement expected before the end of the month.
The monetary policy framework has already been set by the expansionary nature of the supplementary budget presented last week.
Given that the $2,4 trillion budget deficit for the first half of the year was funded from domestic borrowings that saw local debt shooting to $8,1 trillion due to high interest charges of $6,1 trillion compared to the borrowed amount of only $1,96 trillion, the authorities are expected to keep the treasury bill rate at 340% so that government continues to borrow cheaply.
Economists who spoke to businessdigest this week said the $37,1 trillion which is seven times below initial submission of $255 trillion would force the Reserve Bank to print more money to cover the gap as borrowing from the financial sector was insufficient due to the unattractive nature of public debt mobilisation instruments such as the treasury bill which stands at 340% per annum against an annual inflation rate of 7 635% for July.
While the inflationary budget has revived a bullish trend on the equities market, the devaluation of the dollar gave further boosted exporting and mining counters.
Exporters’ exchange rate was devalued by 50% from the Drought Mitigation and Economic Stabilisation Fund (DMESF) rate of $15 000 to $30 000.