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The Battle Of The Markets

SINCE the floatation of exchange rate by the Reserve Bank four weeks ago, the Zimbabwe dollar has experienced its highest level of volatility yet. The Zimbabwean dollar is now trading at a rate of a billion dollars to the greenback.

 

The fragile dollar has been sliding by almost 20% daily.

Analysts are predicting that the is will be worth at least $2,5 billion:US$1 well before the presidential election run-off set for June 27.

The significant acceleration of exchange rates beyond the psychological $1 billion mark has been viewed as symptomatic of an imploding economy, which has resulted in widespread shortages of basic commodities and galloping inflation.

As at Tuesday June 3, Money Transfer traders were trading at £1:$2,25 billion for UK money transfers as MTAs stepped up the pressure of an interbank market which seems to be losing steam to a resurgent parallel market.

The floatation of the exchange rate by the central bank has received mixed reviews.

Based on the rapid and unstable movement of exchange rate on the parallel market and the interbank market, economic pressures may result in the floatation policy being reviewed.

It does not look like the parallel market will disappear anytime soon. Events over the past two months have clearly shown that the black market might be here to stay. At least that is what the rate movement is showing.

Against all odds, the Zimbabwe Stock Exchange (ZSE) is trading on an unprecedented high. The stock market has been on a sustained bull run for the last couple of weeks.

The highly inflationary nature of election monetary expansion has been responsible for the sustained movement of share prices on the local bourse. The huge leap in the inflation figures has also been a factor.

The latest inflation figure 1 694 000% revealed in last week’s edition of this paper clearly shows that inflation is galloping at an unprecedented level.

The rise in the inflation figures has been attributed to increased money supply by the central bank’s injection of huge and unsustainable amounts of local currency in circulation to fund patronage activities ahead of the June 27 presidential run-off.

With the inflation rate almost incalculable and available only on the ‘black market’, the challenge is to determine whether the gains on the ZSE are worth anything in real terms.

The fundamentals have not changed. The ZSE besides reflecting an inflationary asset bubble has been driven by negative rate of returns in other asset classes.

The bull-run has been sustained and sometimes ferocious. Both the industrial and the mining index are in record territory. On Tuesday, the industrial index was up 23,4% to close at a record breaking 310 300 211 311,57 points, whilst the mining index was up 17,9% to 348 748 098 866,06 points.

At the current levels, the indexing of both indices has become as meaningless as the value of the Zimbabwe dollar against major trading currencies. Regardless, with a daily turnover of $3 170 067,21 billion, the ZSE is undeniably the current epicenter of economic activity in Harare.

Making sense out of a chaotic market is not an easy task. On a basic level however, the current rally on the Zimbabwean stock market reflects excessive liquidity on the money market, depressed interest rates and hyperinflation. All these have historically favoured the equities market.

This has resulted in a mania market in which prices are rising as fast as in a fundamentally sound and coherent bull market. The greater difficulty is separating good counters from the ‘dogs’ and employing stock valuation methods which reflect the net value of a portfolio beyond the inflation bubble. There is however a couple of cherries left for the picking.

In a chaotic market, the temptation to invest in counters trading higher inspite of weak fundamentals is high. Although this strategy can be profitable for speculative investors, it is hardly appropriate for long-term positions.

An economic turnaround will benefit investors brave enough to take strategic long-term positions (at present, any position beyond 30 days is considered long term). The recommendation is for investors to go short on speculative counters whilst going long on counters with strong fundamentals. Here are some of our top five long-term picks and why?

Innscor has been one of the best performers on the ZSE in the last couple of years. Last year, the company declared a healthy dividend whenever it made a profit. The company is considered a cash-cow based on its strong retail network.

Innscor is well diversified in terms of product range and branch network. The company has regional operations in a number of African countries earning significant sums of foreign currency. The company’s crocodile division is also a major foreign currency earner. Innscor’s balance sheet strength will allow the company to continue with its acquisitive growth. The earnings potential of Innscor is phenomenal. For those reasons Innscor is a long -term BUY.

Old Mutual is one of the traditional defensive stocks and currency hedges. It is considered the bedrock of any portfolio construction. At $2,2 billion a share, our ‘mutual friend’ does not come cheap. For diaspora investors interested in a firewall against the depreciation of the Zimbabwean Dollar, Old Mutual shares are the choice pick. Old Mutual is a fungible counter that can move up if there is an exchange rate movement allowing it to trade at parity levels with regional and international share prices. The counter leads the top 10 counters by Annual Value traded.

It is one of the most underrated counters on the ZSE. It earned the reputation of a diversified conglomerate well before the establishment of KMAL. TA is a fully-fledged investment company with a wide selection of well-managed business activities both locally and regionally. TA is rated 10th on the ZSE in terms of capitalisation and has continued to deliver shareholder value.

This is a star performer on the mining index, currently ranked 11th on the ZSE in terms of capitalisation. The mining concern’s diamond project should generate significant foreign currency inflows for the company. The company will benefit from a continued devaluation of the local currency against major currencies. Mining and other export counters are set to be the major beneficiaries of the floatation of exchange rates by the central bank. Despite previous operational challenges and the shortage of spare parts, Rio Zim is expected to emerge as one of the top 10 performers in this year.

The diversified conglomerate KMAL is the current king of the pack in terms of performance to date. The company born out of a merger of Kingdom Financial Holdings, Meikles Africa, Tanganda and Cotton Printers is perhaps a successful commercial experiment in maximising value from odds and ends. It brings in together a Bank, a tea company and a hotel chain.

Under the leadership of entrepreneur, Nigel Chanakira, KMAL is driven by a young and ambitious management team. The KMAL share price has so far delivered huge returns to investors. It is expected that the company will close the year as the top performer on the ZSE.

lLance 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 coronation.uk@btinternet.com.

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