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Where do you stash the cash?

By Sagit Group

THE year-on-year inflation rate has been spiralling due to the inflationary pressures in the economy, one of them being high money supply.

Arial, Helvetica, sans-serif”>Returns on the money market have turned into huge negative real returns as yields are ranging from 0% for call to about 175% on 365 days against a y-o-y inflation rate of 411% as at October 2005. There have been significant TB maturities of late, at times running over one trillion in a single day.

The Reserve Bank of Zimbabwe has been active moping up the excess money through the open market operations. However, since the government is the main borrower on the domestic market, rates have been sticky downwards in an effort to curtail the ballooning interest bill. The country’s savings rate is far too low, particularly when so much wealth has evaporated.

Year to date, the stock market has outperformed with the industrial index up 1 569%, while minings are up 1 871%. Several factors have contributed to the recent equity market rally, including relatively good earnings, a general perception that stocks were oversold, negative real interest rates, devaluation of the local currency and the lack of scrip on the stock market – resulting in a seemingly infinite stack of Zim dollars chasing a finite number of scrip.

Over the course of the week, profit taking on the equities market has sent the market into tailspin, as the industrial index retreated by 8% from its prior all time high to close on 18 313 611,62 points as at November 16 2005.

That said, it should be stressed that investors loaded up on stocks in the past months with the average investor holding positions beyond their average equity allocations. In light of the somewhat exaggerated recent rally in some stocks and near term challenges/ uncertainties exacerbated by the upcoming budget presentation, profit taking seems prudent.

Under these conditions it is generally believed to be prudent to reduce exposure and to take some money off the table. However, where do you stash the cash? Rotate the names in the same asset class or invest in other “safer” assets, which are likely to offer negative real returns?

There is an old Wall Street adage that says “make money in stocks, but keep your money in bonds” – assuming there is some form of return by keeping cash or near cash. This doesn’t appear to be the case here, where the runaway inflation is playing havoc to the cash pile – virtually hazing it down in a single day.

At such a rate, there is reason to fret about the possibility of the emergence of extreme speculative behavior with punters likely to hoard any goods perceived to be in short supply.

Lest investors become overly pessimistic, however, many observers would point to some of the factors that might continue to act as tailwinds for the stock market. Currently the main headwinds against the equity markets are profit-taking and anxiety ahead of the budget. Beyond the next few weeks, however, these headwinds might turn into tailwinds, particularly given the inflationary pressures present in the economy and the negative returns in other asset classes.

Although there are still times when sentiment feels poor in the equities, the mere fact that the whole index can rally 15% in one day with some stocks punching up by at least 50% in a single trading session on even the slightest positive news, or negative for that matter, suggests to us that investors remain more fearful of missing “the next big rally” or “the turn” than they are fearful of what by many accounts looks to be a deteriorating fundamental backdrop. Accordingly, most investors remain somewhat cautious in their outlook, and continue to hold on to their priced positions, scarce scrip, in the equity market.

It appears that at current share price levels, downside is likely limited in most of the quality names, and investors with a long-term horizon may find valuation reasonably attractive. Even though the near-term backdrop is complicated, investors need to maintain a long-term perspective.

Accordingly investors should consider adding to their equity positions during periods of weakness.

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