Sagit column – It’s very tough out there

By Addmore Chakurira

THE financial markets seem to have settled down a bit in the wake of the monetary policy statement review by Reserve Bank of Zimbabwe governor Gideon Gono.



face=”Verdana, Arial, Helvetica, sans-serif”>Market rates have slowed and the RBZ has made it clear that it intends to make compounded returns in the 10 to 20 percentage points region above the prevailing inflation rate for overnight accommodation. That said, investment rates, which have generally been below 105% for the past month, are well below the official inflation rate resulting in persistent negative real rates on the money market.


To mop excess liquidity the RBZ introduced special Treasury Bills that are issued at rates determined by the central bank. There are indications that the central bank might buy these back if the institutions are short. That strongly suggests that interest rates are not going to rise to a level that will result in positive real returns in the short-term except in the event of a drastic fall in the year-on-year inflation rate.


Restructuring of government debt is already underway though to-date this has received little support from the open tender operations. This can be attributed to the downward sloping yield curve – discouraging savings and allowing short-term interest rate arbitrage opportunities. Investors are toying with issues of compounded interest rates in a high reinvestment risk environment. Investing at 150% compounded semi-annually yields a compounded return of 206%, which is above the central bank’s inflation rate target of 200%. Having said that, there is a high reinvestment risk with the actual reinvestment likely to be lower than 150% (as year-on-year inflation has been slowing down) thereby resulting in a significantly lower compounded return yielding a negative real return. Investors and savers alike need a premium for locking their money for a longer period.


Profits “kompressed”


Business continues to struggle in this tumultuous environment. The first few months have not been easy for corporates, faced with a slump in demand, a strengthening local currency, high interest rates and spiraling local costs. Some listed companies (Art, CFI and PG) issued profit warnings as significant losses were recorded in the first months of the year. The outlook is not all that resounding for many as they continue to operate below capacity and stock is hard to move. Most businesses are badly hit by operational problems faced with huge interest burden in an environment of diminishing operating margins on both local and exporting initiatives.

More companies are going for deeper mark-downs hoping for higher sales at mark-down prices thus enhancing recovery in volumes due to the increased promotions. Hence companies are faced with a squeeze on operating margins, which might filter through to the bottom line resulting in the earnings momentum decelerating. The current wage negotiations will compound the matter.


Pendulum on the upswing?


Over the past month the stock market has continued to show strong upside momentum, and it might be in the early stages of an evolving major recovery trend. The current low interest rates environment should help maintain buoyancy in the equities market. Short-term movements are difficult to predict, and investors should focus on the long-term direction, which has been decidedly upward over time.


Investors should phase in sooner, rather than later, using a diversified and disciplined strategy. Stay away from momentum investing (buying stocks simply because they are rising in price), as this could yield horrible returns. The time of herd mentality when picking stocks is gone, the economic fundamental surrounding businesses need to be understood for investors to identify winning portfolios.


Because the earnings cycle is expected to decelerate in 2004-05 after an upsurge in 2003, investors should begin to focus on balance sheets rather than income statements when choosing stocks. Suggest focusing on companies with these characteristics: strong productivity trends, dominant market positions, little or no debt, variable cost structures as opposed to fixed cost structures, brand names and an emphasis on volume rather than pricing.


Disclaimer:

Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the authors, and do not necessarily reflect the opinion of Sagit Financial Holdings (Pvt) Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.