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Man’s greatest invention

At the Market with the Tetrad Group

GOOGLE, “man’s greatest invention”, and the results of that search will most probably turn out to be scientific in nature.

ial, Helvetica, sans-serif”>Yet when Albert Einstein, the genius physicist was asked what he considered to be humankind’s finest, his answer was as unequivocal as it was surprising: compound interest.

This financial phenomenon is the payment of interest upon principal and previously accumulated interest which means that the price paid for money use this way far outstrips that calculated using simple interest.

We have seen its effect on the local money market where the issuance of those special TBs at then-unheard of rates of 320% in 2004, spawned the current liquidity on the fixed income market which will see a total of $7,2 trillion maturing during the remaining two weeks of this month alone.

And it is this torrent of money supply created by the compounding which will determine whether the monetary authorities meet their 2006 inflation target.

Since his arrival at the central bank, Dr Gideon Gono’s measures have almost always been dramatic. We anticipate another bold stroke to deal with the trillions which are maturing on a weekly basis.

If such a move were to cure the demand-pull inflation which has been generated by those amounts as well as limiting the budget overruns that may be caused by a huge interest bill on government borrowing, then two big birds would have been killed with one stone.

Both the central bank and finance ministry have voiced their unease over the overwhelmingly short-term structure of government domestic debt.

What better way to solve that problem than to return to issuing much longer-dated paper priced at annual yields closer to the 600% mark that year-on-year inflation is approaching?

This would be much cheaper than the 1 000%-plus being currently paid on the 91-day instruments. Of course, investors commandeered into these instruments will initially howl, but then often the best tactic in football and in life is to do what your opponent least wants.

What would this mean for equities?

Another massive re-rating as investors accept the new reality. Are there other possibilities which we may have ignored?

Apart from the inevitable overpaying that goes hand-in-hand with any asset bubble, the scenario of a significant forex inflow which could arguably suck up the said Zim dollar is a particular worry.

Is a decision to invest based on this risky? Definitely – yet life is all about taking (calculated) risks; there are no certainties in any endeavour and investing is no exception.

Remember, if anyone had said in January that we would be back to a genuinely floating exchange rate by November this year, you would have rushed to put a thermometer in their mouth and called Mars.

If that same person had then dared suggest that the index would be up 14-fold by year-end, then we all would have been shouting for the straitjacket to be put on that poor soul.

On Tuesday, one of the better financial news providers issued out a report on Zambeef’s financials for the first quarter of its 2006 financial year.

Some of you may remember Zambeef: TZI’s first murky financial scandal erupted at this meat-processing group in Zambia.

We shall not go into the details of that saga, or the most recent one for that matter.

There are also humanitarian considerations here – there are some readers of this column who still succumb to acute palpitations every time they are reminded of their holdings in the stock which still remains suspended from the ZSE.

Again, we shall not delve into the merits or otherwise of TZI or Zambeef’s performance.

Rather, the point we seek to highlight from the results of TZI’s former Zambian subsidiary is more of information disclosure, and one from which some of our local conglomerates could well take a cue from our neighbour up north.

Zambeef’s management gave a fairly detailed breakdown of the financial performance of the group with disclosure of both revenues and operating profit for all the divisions – 10 in all.

This is indeed commendable and unfortunately far, far beyond the information that the management of most local listed companies feel the local investors deserve.

Innscor is the one conglomerate which springs most easily to mind – can anyone imagine the executives there telling analysts exactly what sales and operating profits in the region were for the period, or what the operating cashflow figures from the fabled fast food outlets are, or exactly what sort of financial numbers the crocodile skins operations is showing over the past year?

Instead we are treated to vague and bland statements about how the agro-processing division is recording good profitability, how unit growth is strong in the white goods divisions or how strongly the distribution operations are “pumping”.

Getting useful information out of some of these conglomerates is like pulling teeth out of a two year-old – and it is often less successful than even that thankless task. Which makes one wonder what the point of having a business publicly listed if all useful information is classified as “business sensitive” or “strategic”.

This makes the frequency with which we see earnings surprises in this market a bit less, well.unsurprising.

The less-connected analysts are forced to grope in the dark when it comes to forecasting companies’ profitability while executives play cute and treat relatively straightforward information like globally-sensitive state secrets. Yet these are the same people who complain that the market doesn’t “understand their business model” or “incorrectly values” their treasured companies.

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