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SAGIT column – The return of real interest rates?

Kudakwashe Soko

CHOOSING the right financial asset is the key to a successful investment strategy.

Be that as it may, the art of in

vestment in Zimbabwe now goes beyond choosing the financial asset to include an understanding of the financial intermediary through which the chosen financial strategy will be executed.

Monetary policy reviews (MPRs), such as the recently announced Post-Election and Drought Mitigation Monetary Policy Framework on May 19, by Reserve Bank governor, Dr Gideon Gono, have become an important factor in developing an investment strategy and the manner in which the strategy will be executed.

The MPR brought in an array of changes to the financial sector environment and the resultant investment landscape calls for portfolio strategy revision for a number of investors — both corporates and individuals.

At this stage, for investors on the money market, it is advisable to invest in highly-liquid financial assets with the shortest maturity tenure while awaiting the upward spike in interest rates.

Based on the minimum lending rate (MLR) scenario table, interest rates will move upwards of 100% in line with this emerging lending regime.

We believe that to maximise benefits from this term structure challenge one needs to:

*Analyse current investment positions held in their pre-MPR portfolios to understand the implied interest rate yields. With that understanding, the next stage is to compare the finds with the expected interest rate scenarios’ with a view of identifying any opportunity gaps that are likely to be suffered if the pre-MPR portfolio is left unchanged;

*The nature and magnitude of the investment opportunity gap arising out of interest rate changes expected to come through will then define the portfolio revision strategies required to revamp the asset composition;

*Generally, the portfolio reconstruction should be heavily inclined towards unwinding from long-term investment positions into short-dated assets that will give the portfolio enough flexibility to re-price in the shortest possible period — a strategy that is technically referred to as “riding the yield curve”;

*As soon as the interest rate rise begins to plateau, the reconstruction strategy should ideally shift from being short-term to long-term with the objective being to lock in the high rates;

*However, because of the complexity and difficulty of knowing when to switch from short-dated assets to long-dated assets, a blended strategy that is based on holding both short assets and long-dated assets should be pursued. In that blended strategy, what becomes important is the tenure composition of the money market portfolio.

As an example, one could choose to pursue a strategy that sees the portfolio initially overweight on short-dated assets (60% of portfolio) with a gradual shift towards being over weight on long-dated assets.

The abrupt shift in the term structure of interest rates traditionally reduces interest on the stock market especially when real returns can be achieved on the money market.

However, from the same MPR, companies whose activities qualify for cheap funding of 5 or 20% as proposed by the RBZ, there will be a lot of opportunities that are worthy of investors’ interest.

Counters likely to see increased fortunes include OK, Delta, Innscor, Econet, Cairns, Truworths, Edgars and Turnall. These are also going to be of interest to investors because they are all cash-rich, thus likely to benefit from money market investments.

Counters that are highly geared through overdrafts or Public Sector Fund (PSF) window will certainly face the stingy borrowing costs. High gearing at this stage can be lethargic. It is wise to avoid highly geared counters in the face of skyrocketing lending rates.

The environment we are in calls for dexterity in portfolio construction, otherwise the investment field could easily turn into a perennial heartbreak. Laissez faire portfolio strategies do not work in a highly-volatile environment. There is therefore value in riding the yield curve and in clinical stock selection in light of the recently-announced monetary policy.

In choosing an investment conduit or intermediary, it is best to identify an entity that ensures the quickest turnaround in terms of a chosen investment strategy so as to capture the emerging investment opportunities.

The small to medium-sized bank or asset manager could be your trump card in capturing the emerging opportunities on asset revision.

Since Gono’s maiden monetary policy statement in December 2003, the country has been operating in an environment of negative real interest rates.

In fact, the nation has been operating with negative real interest rates for the bulk of the past five years and it has been this anomaly between interest rates and inflation that led to the consumptive and speculative behaviour of the market for the greater part of that period up to the presentation of the maiden MPS.

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