AFTER the fourth quarter review of the monetary policy statement, money market rates have slowed as the central bank cut the rediscount rate to 95% from 110% on secured lending and 105% on unsecured lending from 120%.
The Governor of the Reserve bank of Zimbabwe, Dr Gideon Gono, made it clear that rates will continue to come down in line with the decline in the inflation rate. The decline in the rates is anticipated to result in the convergence of market rates and the concessionary rates (PSF at 50%) by June.
Inflation is forecasted to fall further to between 20% and 30% from an initial target of between 30% and 50% by December. Minimum lending rates are expected to soften from the current levels of around 130-155% to levels of around 110%. Short-term investments on the money market have been hovering around 45% to 60% and the market has remained persistently short.
The expected continual slowdown in the inflation rate is anticipated to be driven by the tight monetary policy, fiscal discipline, turnaround programmes for parastatals and local authorities.
The governor has set aside $10 trillion for the reform of parastatals and local authorities. The governor indicated that the outcome of the current rainy season will remain critical to the attainment of the target level of inflation.
Going forward, agriculture will give the main impetus to economic growth, although this might not be sufficient to offset the other deflationary pressures at work in the economy.
The central bank re-iterated that it will continue with open market operations in order to mop any excess liquidity from the money market so that money supply growth levels are consistent with the set disinflation programme.
These operations are also anticipated to curtail credit expansion.
On the exchange rate front there was no adjustment to the diaspora floor rate nor a devaluation. The carrot and stick was enhanced with exporters able to retain up to 75% of their export proceeds in their FCAs and 25% going at the ruling auction rate.
The exchange rate is gradually expected to converge to one rate as little is now being off-loaded at the government special rate of $824 to US$1.
Tobacco growers received a boost as the top-up support for tobacco was enhanced to $2 000/kg from $750/kg and they are now being recognised as direct exporters.
Equities picked up the baton and ran with it.
As interest rates were slashed, momentum investors rushed onto the equities gravy train pushing the industrial index beyond the dreaded two million mark. The market continued rallying with both indices closing substantially higher during the week.
The market breath was positive with over 200 million shares traded during the week. Biggest volumes were recorded in CFI, FBC Holdings, Fidelity Life, Medtech, Willdale, Interfresh, Econet, Zimnat and Zimpapers.
The industrial index, propelled by the lower investment rates rose to an all-time high of 2 125 252,57 points.
The mining index surged upwards on the back of gains in Bindura, Hwange and Rio Tinto to record an all-time high of 511 935,12 points.
Traders said that investors (punters) were undeterred by the coming election and uninspiring earnings outlook. In some stocks valuations have moved from undervaluation to overvaluation in a very short space of time — less than three weeks.
Going forward, earnings growth are likely to be disappointing and unlikely to match inflation in most cases. They are to be below expectations for most companies. However, those with strong resilience will be rewarded.
In most counters it appears the good news has been largely accounted for in the current share prices and for punters there are limited punting opportunities. That said, there is a general belief that if a stock rises for no apparent reason, it will continue to rise.
While the market appears fairly overvalued, in most instances we will not be surprised if the rally continues.
For investors, stocks remain the best option given the low returns on bonds and cash. As economic growth slows, there should be a gradual transition from the high-beta stocks that have thrived to the higher-quality ones with solid fundamentals that could profit from earnings momentum.
*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.