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Stock market investors sold a dummy

ZIMBABWEAN investment markets have the same kind of drama contained in television soap operas. On Friday last week the bank rate was 300% for secured lending and the money market was awash with liquidity such that players were not taking any short term deposit


With regard to returns, sovereign assets with a tenor of six months and one year were attracting yields of 125,5% and 147%, respectively. On that day the stock market continued on a roll with the bulls seemingly unstoppable. The industrial index closed the week at an all-time high of 488 026,69 points after gaining 2,51%, or 16 544,44 points, on the day to cap a really fine week.

Although the stock market was at face value very firm, the eagle eyed within the investment community would have noticed that all of a sudden the number of sellers had increased. This was odd given that investors normally and aggressively take positions ahead of the release of the monthly inflation data, which, at that point, was only a few days away.

The conclusion grudgingly reached was that something was about to happen and that the well-informed were quietly exiting the market. Come Monday morning, the sellers seemed to outnumber the buyers and the trend firmly entrenched it self during the afternoon trading session. By the end of the day, the industrial index had shed a marginal 1,16% to close at 482 360,93 points.

Soon after the end of the final call over on the very day, heads of financial institutions received impromptu invitations to the Reserve Bank auditorium. The occasion being the presentation by the Governor of a statement dubbed “Governor’s Memorandum to Financial Institutions: Fine-tuning of monetary policy”.

The first fine-tuning came in the form of a two-thirds increase in the overnight lending rate from 300% to 500% per annum for those institutions which approach the central bank for lending cap in one hand and acceptable collateral security in the other. Those without security would compensate the Reserve Bank at a rate of 600% per annum, from the previous 350%. These lending rates had been drastically reduced from 850% and 900% on July 31 2006 when the governor presented his half year monetary policy review statement. It appears that, metaphorically the dial had overshot the necessary position last time around.

The market started to anticipate that yields on treasury bills would begin to rise but they were in for another “fine-tuning” surprise. On Tuesday the central bank announced a tender for two-year treasury bills. All banking institutions have, understandably, shunned the tenders as those who had picked up six months treasury bills at a yield of 125,6% were kicking themselves and are, in hindsight, not looking all that clever.

The other reason for the stayaway was that banking institutions were making frantic efforts to subscribe for the new kid on block, a 5-year Financial Sector Stabilisation Bond (FSSB). Each licensed institution will be expected to hold the FSSB as a performing asset — we wonder what else it could be — in their books with effect from October 16 2006. The FSSB will pay holders an annual coupon of 500% in its first year, 250% in the second, 100% in the third and 25% and 10% in years four and five, respectively.

Commercial banks will, based on their balance sheets as at September 30 2006, hold 10% of assets in this bond while the other siblings, merchant banks, would invest 7,5%, with discount houses, finance houses and building societies having their compliance level pegged at 5%. Asset management companies had their thresholds set at 2,5% of balance sheet size.

A small-scale gold miners’ cost build-up model was introduced, which would track production costs. Under the scheme, each producer will be paid a cost plus 30% margin support price per gramme. The said support price was raised from $5 000 to $16 000 per gramme.

The new price will only be available to small scale producers and will not apply to commercial producers who will continue to be treated like any other exporter. Our calculations, based on the international gold price of US$577/ounce, the new price gives an implied exchange rate of $872 to the US dollar. In fact taking into account the 30% margin on cost means that the exchange rate will be higher than what we have calculated.

Coming to the stock market the Governor hinted that the RBZ, in consultation with Zimra, will soon be insisting that transactions above $50 000 contain the taxpayer’s numbers. It was emphasised that it would be mandatory to capture the tax numbers as tax authorities would reserve the right to inquire. All transactions on the Zimbabwe Stock Exchange are now expected to identify the actual investors and, where nominees are involved, stock brokers must disclose the people behind them.

With the statement not being broadcast live and a copy not immediately available on the website, incomplete and sometimes distorted information was disseminated to the wider investing public through the grapevine and duly caused consternation. The Herald’s main, and eye catching, headline the next day was “Gono strikes again”, an announcement which exacerbated the pandemonium.

Most investors reached for the panic button and were screaming “sell”. Consequently, on Tuesday the industrial index crushed 13,52% — albeit on minimal trades — to 419 056,09 points, a record loss second only to the 14,49% fall recorded on the February 22 2006, when the market reacted to the re-introduction of 91day treasury bills.

On Wednesday, the Herald published what was supposed to be the full text of the memorandum, although it had some sections missing. It was only then when investors read for themselves, and sought clarification and explanations from the fundis that they realised that they had been sold a dummy. By the afternoon trading session, buyers had started trooping back into the market thus sowing the seeds of recovery. Investors do not stay fooled for long after all.

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