Harare | Monday
The Zimbabwe Stock Exchange has continued to baffle investors with the key industrial index reaching 50 152.52 points on July 20, an increase of 183,6% since the beginning of the year. It had risen by 245,99% over the past 12 months.
The Zimbabwe Stock Exchange was ranked first among the emerging markets by Standard and Poor in June, beating 28 other markets.
With the government keeping interest rates down, though inflation shot up by nearly 10 points to 64,4% in June, investors are likely to keep flocking to the equity market as it is the only investment at the moment that beats inflation.
But according to one of the leading stockbroking firms, Sagit, investors are beginning to raise some important questions. How long will the bubble last? So far, it looks indefinite. The desperation for scrip was shown in the oversubscription of the offer by Trust Holdings.
The offer was oversubscribed by 21,6 times resulting in investors being allotted only the first 50 shares and the balance at 2,214645%. The Trust offer was one of the most expensive local initial public offerings as the share price was $15, which meant a minimum investment of at least $1_500.
But with a looming food shortage and presidential elections due early next year, the government could introduce some populist policies that could upset the cart. Sagit says, though remote at this time, an interest rate hike could have a telling impact on the stock market.
When Makoni took over as Finance Minister last year, he proposed that interest rates be linked to inflation, but this policy was abandoned in January in what he said were measures aimed at promoting the productive and export sectors. Linking interest rates to inflation would see a stampede from the stock market as the money market would offer better, risk-free returns.
At the moment investors have deserted the money market because of the low interest rates. Treasury bills, which offered returns of 47% in December, are now offering a paltry 14,94%, for example. Sagit says timing the stock market is, therefore, critical if returns are to be maximised.
It says the government could resort to price controls to ease the cost of living on consumers ahead of the presidential elections due by April next year. The government has already monopolised the purchase of all grain.
This is likely to backfire as the government is offering unattractive prices for grain, discouraging farmers from growing the crop because of low returns. Sagit says in the past, investors have reacted adversely to price controls as they compromise the profitability of companies.
It is not clear yet how acute the food shortage will be, but President Mugabe will, for the first time in 22 years, be facing his stiffest challenge. Parliamentary elections last year have proved that the opposition Movement for Democratic Change is no walkover.
Sagit also says the 2002 national budget, which should be announced in October, could be an important event that could consolidate or break the current stock market rally. It says the 2001 budget targeted average inflation at 70%, but it has only averaged 58% in the first half of the year.
This, Sagit says, points to accelerated inflation during the rest of the year, perhaps as high as 100% by December. With the prevailing low interest rates, the economy would continue to deteriorate.
It says that, interestingly, political developments did not play a significant role in the first half as they did in the second half of last year, but things could be different. Several by-elections are lined up in the second half. With each by-election seen as a test in the run up to the presidential elections, violence is likely to escalate, further tarnishing the image of the country.
With its huge domestic debt, the government is not likely to review interest rates as it is making a huge saving on its interest bill which should have gobbled nearly half of total government expenditure. – The Insider
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