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Best September returns since 1971

SEPTEMBER was a good month for both stocks and commodities across the globe.  Spot gold surged to a record high of US$1 313,20 and is still firming while US equities posted the best September returns since 1971.

Gold rallied on the back of projections that the recovery of the world economy could be much slower than earlier thought. In the Euro-zone, negative sentiment emanated from the downgrade of Spain’s credit rating by Moody’s. The general perception now is that problems in Europe could actually get worse before they improve.
Equally, in the US there is a group of economists peddling the view that the world’s biggest economy faces a high chance of a “double dip” recession — experiencing a second recession hardly a year after recovering from the first one. In an effort to prevent the occurrence of a ‘double-dip’, the US Federal Reserve recently indicated that it might carry out additional quantitative easing measures. Quantitative easing is a process whereby a central bank prints money and pumps it into the economy to encourage banks to lend to people and companies, hoping that they will spend more and boost the economy.
It seems possible that some major economies may decide to print their way out of the current economic stagnation, just as they did in 2009 to starve off the recession. The Bank of Japan pointed out that it has to inject US$60 billion to create demand in its economy. The European Union is also likely to inject some money into its economy.
Coming closer to home, the South African rand continued to firm in September, breaking below the psychological level of ZAR7 against the US dollar.
Amongst other reasons the rand is benefiting from capital inflows coming as carry trades. In simple terms, there are some investors who are borrowing cheaper funds from economies with low interest rates such as the US and invest on the South African bond market where the rates are much higher.
Every time an investor comes to South Africa with his US dollars or any other currency, he first has to buy the rand.
And true to the Economics 101 principle that price increases whenever demand exceeds supply, ceteris paribus, the rand has been firming as capital inflows increase. This, inevitably, is making exports from that country uncompetitive and pressure is mounting for either a rand devaluation or curtailment of carry trades through levying a Tobin tax on capital inflows.
So much about an economy worried about receiving more capital inflows that it can’t handle.
In Zimbabwe, our problems are quite the opposite. Foreign capital inflows are coming in dribs and drabs yet the economy has a huge appetite for money to nurture the positive growth experienced in 2009. It is a common view that the economy has stagnated in 2010.
The performance of the stock market this year, except in January, July and September, aptly captures the downbeat mood in the economy. Year to September, the industrials were down 9,8% and the resources were 21,5% lower.
However, in September, the local equities market was, like other bourses, positive with both the industrial and mining indices ending higher by 4,7% and 14,1%, correspondingly. For the quarter, the industrials pushed up 7,5% while the resources advanced 1,8%. The market capitalisation in September gained 1,9% to US$3,341 billion but it was 13,6% lower than on  December 31. Market activity as measured by monthly turnover dipped by 29,4% to US$25,5 million. 
Market breadth for the month was positive with 35 risers, 29 fallers and 12 static counters.
The top five performers comprised Falgold, Celsys, ABCH, Pioneer and Hwange with growths ranging from 50% to 77,5%. Of these five, only ABCH — which recorded strong performance in some of its operating markets — and Hwange seemed to have persuasive fundamentals to justify the price movements. The colliery company recently secured some funding to recapitalise part of its operations which helped its production to increase. 
The trio of Celsys, Falgold and Pioneer are, in contrast, struggling. Printing cheque books and supplying automated teller machines to banks which formed the core of Celsys activities are now low volume businesses. Pioneer and Falgold were both in loss making positions.
Bottom five performers comprised CFI, African Sun, Interfresh, Medtech and Steelnet with losses from 22,7% to 50%.
CFI has, so far, evidently failed to turn the corner yet its competitor, Irvines, seems to be doing well. Irvines’ earnings contribution to Innscor financials for the year ended 30 June 2010 suggests that Irvine earned approximately US$6,8million as profits. In comparison CFI’s March financial results were in the red.
Colcom released arguably the best set of results for the June reporting period. Turnover was US$41,8 million and net earnings constituted 11,3% of that. The company paid out 48,8% of its profits as dividend. Capacity utilisation in all divisions is now over 70% with the pies division operating above 100%.
Listed resource companies announced poor financial statements with only Hwange being profitable.  Bindura and Falgold, both of which are not operating, had what can be described as the sorriest results for the sector but surprisingly their respective prices ended September up.
RioZim had an improved loss position but its price was severely punished. It shed 31,7% after failing to make meaningful progress on the rights issue it announced more than six months ago.
Financial results from banks did not spring any surprises with CBZH remaining the most profitable in the sector. Other profitable entities were FBCH and ZBFH. Seeing red were Barclays and NMB which closed in loss positions of US$787 238 and USD2,3million, respectively. In terms of share price performance CBZ, NMB and ZBFH were down 10,3%, 10% and 30,7%, respectively, while Barclays gained 5,6% for the quarter.
Given the inconsistency between earnings and share price performances, it appears that in this market profitability does not count for much when it comes to buying banking shares.
Otherwise, how could Barclays continue to have a market capitalisation which is twice that of CBZH yet the latter is dominant by all other measures?
In the outlook, market activity in the fourth quarter is expected to be much quieter than in the previous three as everyone prepares for the festive season.


By Ranga Makwata

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