HomeBusiness DigestHeavy heat, dim light?

Heavy heat, dim light?

By Addmore Chakurira

ROMANCING inflation? The first half of the year has come and gone, for some. What an eventful part of the year with all the resolutions having gone astray.

face=”Verdana, Arial, Helvetica, sans-serif”>The paint-brush strokes on producer and consumer prices continue sky-rocketing. Inflationary wage awards, the fuel and foreign exchange crisis, further adjustments in administered prices – energy, fuel and utilities – and an expansive fiscal policy will push up the rate of price increases. The official y-o-y inflation rate has spiked to 144,4% for May 2005 from 127% in January 2005, having been on a slide last year.

At this juncture there appears to be a lot of inflationary pressures, as the pressure on the Zim dollar remains high, higher world oil prices, shortage of power in the region and high money supply. Although the drought has exacerbated the food inflation outlook, core inflation has also run, having jumped to over 140% y-o-y in May 2005. The recent hikes in rent, fuel and transport and communication will have a significant bearing on the y-o-y inflation figure for the coming months.

However, due to timing differences this might not be reflected in the June 2005 official inflation figures. There has been a gravy train on the housing market with prices having sky rocketed exacerbated by the recent the clean-up operation.

Broad money supply (M3) has since picked up since the beginning of the year accelerating to about 215% as of March 2005 from 176% in January. Inflation psychosis seems to be rearing its ugly head once more, having witnessed a marked decline in 2004. With inflation having spiked up the markets have been anticipating a further hike in interest rates, so as to maintain real positive returns on the money market. If the inflation rate continues to accelerate in the short term (as is largely anticipated) the money market rates need to be adjusted (from the current yields of around 150% for 91-TB’s) so as to maintain a semblance of real positive returns.

Although investment rates on the money market have been adjusted upwards as per Reserve Bank stance deposits rates have not been adjusted (still quoted around 10% for current accounts and 25% for savings) offering arbitrage opportunities for some.

That said, inflation is generally expected to ease in the long run aided by the depressed demand and a tight monetary policy. The markets eagerly await the June 2005 inflation figure, which is expected towards the end of next week.

Nothing to sneeze at. The economic slowdown has resulted in the currency crisis the country is facing. Over the past years the country has witnessed a sharp pullback in production across all sectors of the economy. Shortages are once again with us, not just of imported goods but even locally manufactured goods. Pity those with kids – winter cough mixture has run out!

Since around April 2005 the country has been running almost on empty due to the crippling fuel shortages. Using the black market exchange rate (US$1 to $20 000) petrol now costs around US$4 per litre when available. Surely this should rate as one of the most expensive countries in the world. This can have serious consequences for the turnaround programme, as more companies are likely to scale down or close.

What’s behind the current rally? The equities market has started to stage a decent rally ignited by the anticipated release of the June inflation figures. Naturally, it would be good news to see this rally spread to the whole market, signaling a true market recovery. But, because earnings drive performance, we do not expect such a recovery until the current muddied earnings picture yields evidence of clearing. The near-term outlook for equities remains clouded. It is still premature to call for a sustained bounce. Both top line and bottom line growth remains very challenging given the looming depressed demand and punitive borrowing rates.

Some of the aggressive recent percentage price gainers might be vulnerable to a pullback when fundamental prospects once again enter the equation. For those who need an exposure to the equities market, focus should be on stocks with higher quality fundamentals. Although returns on fixed income have posted some semblance on positive returns should be pragmatic in their asset allocation decisions. Rather than build-up excessive cash positions, the conservative investor should construct defensive portfolios relative to benchmark constraints to protect against bouts of volatility.

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