By Lance Mambondiani
THE year 2007 turned out to be quite an eventful year for financial markets in Zimbabwe. We had price controls, the passing of an empowerment law, a
quadrillion-dollar budget and a quadrillion-dollar stock market whilst inflation topped 14 000%. All economic indicators continued to point east, plunging the country into a deepening economic turmoil of catastrophic proportions. The Finance minister, Samuel Mumbengegwi predicted positive growth in 2008 and a slowdown in inflation, although such optimism seemed unsupported by fundamentals on the ground.
Property prices soared, with some middle density houses in Harare costing more than a house in London or Sandton inflated by an asset price bubble blamed on diaspora money chasing too few houses.
The stock market defied economic indicators and rallied for the greater part of the year trading in record territory and bringing handsome rewards to many investors. The industrial index closed the year up 322 111% at 1 911 538 281,84 racing towards the two billion mark. The mining index closed the year up 477 752% at 2 363 257 849,25 points as the stock market remained a haven from hyperinflation.
The stock market remained a spot of bother for the authorities being the last remaining “free market” in an increasingly interventionist policy environment.
Many investors entertain hope in 2008 and dare to believe that the year will see an improvement in our circumstances. It appears, however, that we started 2008 amidst policy confusion and flip-flops. The central bank governor, Gideon Gono made a nocturnal policy statement on Wednesday 19 December 2007, shelving plans for the introduction of a new currency and introducing higher denomination bearer cheques.
The $200 000 bearer cheque which was the highest value note was to be phased out and higher value cheques of $250 000, $500 000 and $750 000 started circulating the following day. This was an attempt to ease the cash problems that had gripped the country, paralyzing the payment system. The central bank then extended the deadline to exchange $200 000 dollar bills previously set for the December 31, 2007 hours before the bills ceased to be legal tender. Indications are that the bills will not be phased out after all, seeing Sunrise 2 resulted in the recovery into the banking system of currency believed to have been hoarded by parallel market dealers. New stringent RTGS rules were also introduced within the same period but later relaxed.
The introduction of new denominations is also a direct result of inflationary pressures on the dollar, with the same amount of monetary units continuously decreasing purchase power impeding the well being of daily transactions because of the risk and inconvenience of carrying large stacks of bills.
The governor refused to consider a redenomination of the currency or the slashing of more zeros from the currency, discounting the strain on bank IT systems as diminimis amidst accusations that some banks were working in cohorts with a group now the new target of economic saboteurs popularly referred to as “cash barons”.
Policy makers have often been quick to mention that Zimbabwe’s economic circumstances are quite unique and cannot be solved by textbook economics. The current policy changes in Zimbabwe hardly constitute coherent economic policy. Although our economics have turned into that of “adaptation and survival”, dynamic inconsistency provides a theoretical basis for discussions on policy clarity and credibility. Without a commitment to future policies or a consistency in the present ones, the incentive to speculate and deviate into an informal market is often greater resulting in the worsening of conditions. This lack of clarity itself is often the single largest contributor to black market transactions.
The central bank in its diligence to turn around the economy has been leading the crackdown on the so called “economic saboteurs”, such as errant bankers, money transfer agents, hotels, government ministers accused of externalizing currency and now the cash barons. Whilst this is commendable, introducing policy measures to deal with people instead of fundamentals will reduce the central bank into the human resources department of the country, wasting time and resources on introducing policies to manage human greed and not long term economic policy.
It is unlikely the central bank will be able to chase errant behaviour between Harare and the UK and still manage to remain effective as a monetary authority. Policy effectiveness will require monetary authorities to return to basic economic fundamentals and monetary policies to address some of the basic problems. The bull run has surely caused a stampede to the stock market in the last quarter of 2007. The problem with this for stockbrocking firms is an increase in administrative costs due to a rise in speculative trading by “in and out” traders. As a result, a number of brokers have increased minimum investments to between $1 and $5 billion per counter. The ZSE has now been accused of being a billionaires club with small time investors being encouraged to pool their investments or to invest in unit trusts. Whilst this may appear the case, a $1 billion does not seem to buy much these days. The challenge is for brokers to keep up with hyperinflationary conditions and remain credible as proper businesses.
With money market dealers currently quoting between 120-130% TB Rates for short term and between 140-160% for 30 to 90 days, investing on the bond market is financial suicide. The scramble for shares is indicative of a market starved of meaningful investment options.
Meanwhile, the rally on the stock market continues to be glamorous. The industrial index opened the week 8,51% up to trade at 2 44 462 555,93 points following gains in Celsys, Afdis, Star and Zimpapers with only three counters trading in the negative.
With such an impressive run, it is easy to forget that share index appreciation of 8 to 15% experienced on the ZSE is a rare phenomenon anywhere else in the world possible only in a dysfunctional market. However, whether the market is dysfunctional or resembling more of a casino than a stock exchange, with a year to date rise of beyond 322 111, 00 %, few investors would be complaining.
Although it is quite possible that increased traffic to the bourse will create an asset bubble with calamitous consequences, our money is on the stock exchange charging past the 3 billion-point mark before elections in March this year.
Investors appear to be in one big hurry to realize returns on the market as if money is going out of fashion. We encourage investors to take advantage of this opportunity and increase their exposure to shares in the first quarter of 2008.
One way of realising significant returns on a charging market is to do a swoop on low cap, penny stocks. Based on simple arithmetic logic, since ranking and portfolio performance is by percentages, the big percentage gains always unfairly go to the smaller stocks, although some higher priced shares have also come close. Chances of a higher return for speculative investors are therefore in counters such as Celsys, CFX, Zimpapers, ZPI and OK Zimbabwe. Price dynamics dictate that fewer prices will remain in the the 100 000 threshold for long. A number of counters currently below this threshold, with good fundamentals are set to benefit. You should however be careful and not confuse an undervalued stock with one that’s simply ‘a dog’.
The Zeco IPO is also a good opportunity to get into the market on the cheap. Zeco is listing within a challenging manufacturing sector reeling under the effects of decreased productivity due to a contracting operating environment. Although the current outlook on the manufacturing sector is remains gloom due to a hyperinflationary environment and price controls which caused production costs to be way above profitability, future prospects may not be so bad. We however believe that the Zeco IPO is a good buy for two reasons.
Firstly, for long-term buyers, the manufacturing sector is always the first to recover under a positive business environment. Secondly, the offer price of $24 927 makes it one of the cheapest stock on the market even before it is listed. Few counters with the same fundamentals in the manufacturing sector are trading at such a low price. By the time the company lists on the stock exchange on February 22, the offer price will most likely be way below market value and can easily correct significantly in the first week of trading followed by a possible stagnation thereafter.
Based on Technical analysis by some brokers, the valuation of Zeco using the Net Asset Value formula would yield a value of $46 421,80 per share, representing an 83% premium and upside potential on the offer price. If you factor in a 10% market driven appreciation by February 22, our estimate yields a conservative fair price of approximately $55 000 per share.
The offer price is therefore a possible bargain, which is likely to be a fraction of the real value by the time the counter lists in February. We consider the Zeco IPO as one possible opportunity likely to create value post listing for speculative ‘hawk investors’ and good long term value for long term investors with ‘bags of optimism’ regarding the future. We consider this a buy.
The Zimbabwe dollar notched up 31% against major currencies in the week under review moving from last week’s rate of £1: $7,5 million to $9,8 million against the British Pound. The parallel exchange rates are now trading approximately 32 566,67% from the official rate which remains pegged at 30 000 to the US dollar. At these levels, any pretence that trade by industries in foreign currency should be at the pegged exchange rate has been stretched beyond a joke.
The standard deviation between the official and the parallel market rate stretches thin the probability that any company will be able to acquire money at the official rate. Figures don’t lie; they have the nasty habit of revealing cover-ups, half-truths, scare tactics and distortions regarding nasty secrets. If we are agreeable that math involves perfect logic, then statistically it is impossible to convince any sensible human being regardless of megaphone calls for patriotism to trade in a market that 32 566,67% divorced from reality.
Whilst there is agreement that currency misalignments and gyrations associated with floating exchange rates can have serious consequences for developing countries with small and open economies and a relatively large stock of national debt. It looks particularly challenging that a pegged exchange rate can help stabilize macro-economic fundamentals within a 100% importing economy with dwindling exports due to industrial contractions.
Although realistic exchange rate realignment is almost impossible, three months before a watershed election, the official rate is in need of an adjustment for it to retain any sense of credibility. The widening gap between the state rate and the rate on the ground will remain in itself a source of fuel for a combustible rate collapse which will be the tipping point of an economy ravaged by a sequence of man-mad disasters.
The current rate slid in the market has been a result of the cash problems currently being experienced in the market. Current developments also point towards heightened tensions between the central bank and market traders. Recent reports suggest that a prosecutor has called for an investigation into the central bank’s role in the parallel forex market following the bank’s payment of $2,1 trillion dollars to Flatwater Investments to buy foreign currency for the procurement of tractor for the Mechanisation Programme. Based on this transaction alone, the details of which are a matter of record, a ‘reasonable man’ being that common man in the street would conclude that the central bank is involved in procuring currency on the “black-market” to finance the nation’s supplies. Although this is not particularly problematic, if this were the case however, it is an issue to see how the central bank would remain a moral authority in prosecuting business for trading on a similar platform in which they are the biggest player.
* Lance Mambondiani is an Investment Executive at Coronation Financial Plc, an international financial advisory company registered in the UK trading in Southern Africa and the United Kingdom. He can be contacted at email@example.com.