Some hard lessons to learn

By Admire Mavolwane


TODAY marks the close of yet another horrible month for a number of players in the investment markets. Beginning the second week of this month, the stock market looked as if it had bottomed out and was showing signs of recovery but the last three days

have put paid to all the high hopes. 

Notwithstanding these mid-April gains, the market is yet to claw back the losses of 14,14% and 20,14% incurred in February and March, respectively. For the year to date the industrial index is showing a 92,49% gain some 53 percentage points lower than the 144,95% recorded in January.

The problem, as we have highlighted before, is that the bulk of the losses are sitting with the newer converts to the stock market who bought in towards the end of January.

It is this segment of investors that has been crying out loud and is seen holding calculators everyday, enumerating their unrealised losses and contrasting them with interest income foregone on the money market.

What this does ultimately is to undermine confidence in the share market if some of the not so quiet mumblings and vows not to gamble again are anything to go by. The positive correlation between risk and return is surely a hard lesson to learn.

The foreign currency “investor” is also singing the blues. Notwithstanding the acceleration of inflation from 585,8%  to 913,6%, a differential of 327,8%, the exchange rate has just about doubled from $100 000 to $210 000 to the green leaf.

However, working it out the other way using the monthly inflation rates of 18,6%, 27,5% and 19,8% for January, February and March, respectively, the dollar is still slightly ahead of the 81% compounded monthly  inflation rates.

Once we resort to calculators and other mathematically or scientifically elaborate measurement of returns, it becomes apparent that one is looking for solace.

The only guys who have been smiling are those investors who have either a diversified portfolio made up of all three asset classes or have remained faithful to the short-term money market investment duration.

The money market players have been enjoying high interest rates, which at some point peaked at 400% per annum on the short end. A counter argument against the latter category will be the negative real returns that they have endured since June last year. At the moment, however, the three markets are showing negative real returns so investors are rather worse off.

The trouble with the money market is that it is essentially a zero sum game. Whenever the investor is being enticed by a high interest rate to invest his money, the institution looking for money will be sacrificing a good slice of its profit margin.

The situation is made worse where an institution is using the deposit to fund a sovereign asset that is earning much less than the deposit interest rate. A question which might be asked then is; when did banks start practising GMB economics? Since late February into early March, when the central bank started issuing short dated treasury bills at relatively high yields when compared with the ones prevailing then, would be the response.

To tighten the noose the central bank also increased the statutory reserve requirements, which saw huge outflows from the market in one day, at the same time hiking the overnight accommodation rate to 750% per annum compounded daily.

As with the case of the state grain utility, this rather unfortunate situation arises from factors exogenous to the individual bank itself and is a burden foisted upon the sector by an external force.

Whereas the GMB can afford to pass the buck on to the fiscus, the banks cannot exactly do that. Their recourse is to ask shareholders to put up more money, but that could be asking too much from an already overburdened lot.
Many of the institutions had forewarned shareholders that they would be coming to the market with rights offers and other capital raising initiatives of some kind. Initially, the idea was to top up the distributable reserves already sitting on the balance sheets but now they have to raise more than previously envisaged.  Anyway, as they say: “Good bankers, like good tea, can only be appreciated when they are in hot water.”

Bankers do not cry, if they did, then there could have been a lot of wailing in the Reserve Bank auditorium after the presentation of a memorandum statement to banking sector chief executives by the governor on Monday.
After much hullabaloo about private health institutions raising their fees and the intervention of government, a 70% increase was granted.

Medical aid organisations immediately upped the expected contributions from members by between 70% and 85%. Not to be outdone, the government itself has reviewed fees at public health institutions from $300  —by comparison, a piece of chewing gum costs $5 000 — to between $800 000 and $1 million.

It is not necessary to compute percentage increases in this instance. No doubt, however, the increase was long overdue but suffices to say that this highlights the folly of administered prices.

If the official who has the handle on the fees is somehow constrained, then frequent adjustments are forgotten.

Large spikes are then experienced when the lid is lifted.  The need to improve service was the rationale given this time around which is somewhat misleading and introduces an expectations gap because it implies that patients who were getting a $300 service should now expect a $1 million-dollar service. Press headlines have this week been dominated by “Massive pay rise for teachers, armed forces”; “Hospital fees skyrocket”; “Harare water charges shoot up”; “RBZ ups overnight rates” and we expect further such announcements in the coming weeks.

It appears everyone, everywhere, is playing a catch-up game. Unfortunately, the target keeps on moving. All these increases cause more inflation but have also been necessitated by inflation.

Essentially we now have a classic chicken and egg situation, what causes what. But the question is when and what will break the circle, if it ever will?

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