By Ranganayi Makwata
MONEY is invested for a return. The return is usually income (such as dividends and interest) or capital gains, or both. It becomes a problem when i
nflation is on the trot as is the case with Zimbabwe.
Is the income or capital gains good enough vis-à-vis benchmarks such as inflation or the exchange rate, many an investor often asks?
It is not surprising then that as the battle against inflation looks easier to lose than win, investors have to summon up all their ingenuity to stay afloat.
One such “innovation” has been to move towards currency hedge stocks.
These counters are valued using the exchange rate as a reference point.
Old Mutual and PPC are the two counters in this category and they, including other blue chips, usually form the core of most portfolios. The bulk of Old Mutual’s business is largely foreign domiciled.
PPC is a South African entity. The view in the market is that their share prices on either the London or Johannesburg Stock Exchanges should directly be converted into Zimbabwe dollars, using an appropriate exchange rate.
The shares are also deemed fungible. But the question is which one of the two has been a better currency hedge in recent times?
Over the years Old Mutual has proved to be the more popular of the two. This is because Old Mutual is almost fully fungible while PPC is partially interchangeable.
Besides the Zimbabwe Stock Exchange (ZSE), Old Mutual is also listed in London (LSE), Johannesburg (JSE), Malawi and Namibia. PPC has only two listings: on the JSE and ZSE.
Old Mutual can be bought from these other exchanges and sold on the ZSE.
Most of these shares can also be uplifted from Zimbabwe for sale on other markets, mainly JSE and LSE.
While it is possible to move PPC shares from the JSE for sale on the ZSE, the reverse is not possible, because of exchange control restrictions.
PPC shares on the Zimbabwean register cannot be sold in South Africa.
Taking July 31, 2006, the last day before the three zeros were lopped off, as the base, Old Mutual was trading at $2 530 while PPC was at $28 000.
For an investor who was holding 10 000 shares of each on that day, the market values were $25,3 million and $280 million for Old Mutual and PPC, respectively.
Following the PPC share split which saw investors getting an extra nine shares for every one held, the 10 000 PPC shares assumed above increased to 100 000 post the split.
The split was done on July 9, 2007. On that day, the PPC share traded at $650 000.
The prices for the two counters jumped to $6 million and $4 million for PPC and Old Mutual correspondingly as at October 24 2007.
Assuming that our hypothetical investor is still holding 10 000 Old Mutual and 100 000 PPC (remember the 10 000 PPC were split 1 for 10), his investments on the two counters would be worth $40 billion and $600 billion in that order.
Investments in PPC grew by 214 186% compared to Old Mutual’s 158 003% over the period under review.
It is apparent from this example therefore that PPC has outperformed Old Mutual by 56 183 percentage points during this period.
The exchange rate which on the alternative markets is said to be around $1,3 million/US$1 has moved by 236 264% outperforming both counters. But the point still remains that PPC has been the better of the two if the analysis above is anything to go by.
Moreover the counter has since recouped the zero it lost following the share split on July 6, 2007. Does this mean that Old Mutual has lost its aura as the currency hedge stock of choice?
To the contrary, the significance of this stock has actually increased, what with the ever increasing gap between the official and the parallel exchange rates. Many investors are still, and look set to continue, going the Old Mutual route in search of a real return.
Foreign investors keen on snapping up Zimbabwean assets have been largely responsible for Old Mutual’s lethargic performance.
Most foreign investors are bringing in investment capital in the form of Old Mutual shares from either the London or Johannesburg Stock Exchanges, disposing of them on the ZSE and using the proceeds to buy other counters.
The alternative could have been to bring in hard currency and exchange it for Zimdollars and then invest the proceeds.
But the exchange rate is not favourable and so neither is this option.
The result is a depressed ZSE Old Mutual price as incoming shares are literally dumped on the market.
With an increasing number of foreign investors reported to be eying local assets, the Old Mutual price is likely to continue playing second fiddle to PPC.
Turning to corporate transactions, the Meikles, Tanganda, Kingdom and Cotton Printers merger appears now
to be a done deal. This is despite the fact that it still has to be approved at EGMs for the three companies slated for November 15.
Details of the deal were released October 6. On that day, arbitrage existed and astute investors should have easily made money out of it.
The ratios were 17,67 Meikles for every 100 Kingdom while Tanganda shareholders were assured of 17,2 Meikles per every 100. Prices on the October 6 were $100 000 for Kingdom, Tanganda ($150 000) and Meikles ($750 000).
Selling, say, 18 Meikles shares and simultaneously buying 100 Kingdom would have resulted in an investor receiving $13,5 million while paying $10 million.
A net gain of about $2,1 million after transaction costs would have come the investor’s way. Tanganda, at $150 000 was pricy. Arbitrage profit would have been made by selling Tanganda. If an investor had sold, for instance, 100 Tanganda, he would have grossed $15 million.
Assuming further that he at the same time bought Kingdom, at $100 000 per share, he could have bought in excess of 130 shares after cost, equivalent at the time to about 23 Meikles shares. So there you have it, it is always easy to make money, supposedly with hindsight.