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A fresh outlook on the future

At The Market with Tetrad – Brian K Mugabe

AFTER having started the year on a bright note with the industrial index putting on 21% in January, the subsequent months of February and March were months

of despair for investors with the main index shedding 3% and 26%, respectively.

This scenario came about as negative sentiment towards equities took a firm grip on the markets fermented by reports from industry and commerce of poor first quarters, caused mainly by the impact of horrendously high interest rates in November/December 2003, falling consumer disposable income which led to notable decline in aggregate consumer demand and unviable exports due to the then prevailing unfavourable exchange rate.

Compounding this state of affairs was the firming of interest rates during the period as the money market experienced liquidity constraints and was generally a bit unstable, as witnessed by the curatorship and liquidation proceedings instituted against various players in the financial sector. With the central bank offering gilt securities in the way of RBZ financial bills at rates of as high as 320%, and given the uncertainties prevailing in both money and equity markets, it was no surprise that equities remained the less preferred investment vehicle.

April proved to be a better month as the index put on 13% to close at 391 732 points. The RBZ governor confined the market’s rally to the last third of the month fuelled by the presentation of the monetary policy quarterly review on April 21. Specific measures announced in the document that gave impetus to the market revolved around foreign exchange management as it related to exporters and the pronouncement that measures would be taken to reduce interest rates.

The period from April 21 to the month-end thus saw the index gain 13,8% or 47 584 points. The mining index also performed commendably gaining 56% for the month to 144 111 points as it firmed in sympathy with the industrial index. The gain in the minings was amplified however by the delisting of Ashanti and Ashanti ZDR, following rationalisation of its takeover by AngloGold.

An analysis of gainers and losers for the month saw Bindura and Rio Tinto coming out as the top two gainers, up 73% and 67% to $1 300 and $4 000, respectively. Other counters to make the top 10 were OK, Trust, First Bank, Natfoods, Barclays, Econet, Murray & Roberts and Apex, with gains ranging between 66% and 50%. Forty-seven of the now 80 counters listed on both indices experienced a gain of some degree, while 27 fell. Of the losers, the bottom 10 comprised NicozDiamond, Falcon, TA, Turnall, Fidelity, Cairns, Zimpapers, Pioneer, Century and Hippo.

The losses here ranged between 43% and 25%. The money market, following on from the governor’s review, saw interest rates eventually dropping accordingly. The spillover effect of the market shortage from March had seen firm interest rates of over 350% at the beginning of the month on the back of market shortages in excess of $100 billion.

Treasury Bill maturities amounting to $466 billion gradually reduced the market shortage and the market turned to a surplus position during the first week of the month before reaching a peak of $271 billon on April 21. Other liquidity inducing factors included central bank foreign currency purchases, estimated civil servant salary inflows of over $50 billion, as well as a $60 billion injection for productive sector financing.

As a result, interest rates tumbled to as low as 10% for one to 14 days, while 30, 60 and 90-day rates were quoted between 50% and 100%. The RBZ actively worked towards reducing interest rates by suspending the issuance of financial bills citing interest cost constraints given the high rates at which they had been subscribed for.

The overnight accommodation rate for financial institutions was also slashed from 400% to 205% while all Treasury Bill tenders held post the monetary policy review rejected any rate higher than 105% annually. This was widely interpreted as a clear signal regarding where the monetary authorities would like to see interest rates.

Under these conditions, if they prove sustainable, one would expect the equities market to carry on trading in positive territory, as it has continued to do since the April month-end, closing this Wednesday at 416 094 points.

Turning to company news, Interfresh this week published its first quarter trading update for this year following its AGM. In it, the company highlighted that it had performed below expectation for the first quarter as exchange rate viability issues as well as subdued local demand offset an increase in export volumes.

Divisionally, Mazoe Flowers and Smithfield Flowers were the ones to go against the grain performance wise, with rose export volumes up 50% on 2003 for the former, while hypericum volumes were 12% above projection for the latter. Prices were also pleasing, in line with budget and 15% ahead, respectively. Interspan, Transfruit and Citifresh performed slightly ahead of last season in terms of volumes though international prices are expected to be higher than last year, while Mazoe Citrus Estates remained constrained by land resettlement issues, though the second and third quarters are still expected to yield “excellent” results. Wholesale Fruiterers, Marlon Trading and Interfoods were the most negatively affected divisions.

Despite the disappointing performance the company still expects to achieve “satisfactory” results by year-end as its increased capacity generation initiatives bear further fruit while the measures announced as regards the exchange rate subsequent to the date of the update have certainly improved the prospects for Interfresh going forward.

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