Kingdom Market Report with Kudakwashe Tapfuma
Year 2010 is likely to be another unforgettable year for investors on the local fixed income securities market as fundamentals on the ground continue to indicate a prolonged liquidity strain on the economy that will sustain the current elevated interest rates.
Liquidity remains elusive on the money market notwithstanding the hype that had been generated by sentiment that money supply growth would increase tremendously in the second half of the year. The expectation was principally based on the impact the anticipated revenue from the stock pile of Chiadzwa diamonds would have on the overall economy.
The erratic nature of the Chiadzwa diamond sales, consequent to the stringent conditions imposed upon the nation by the diamond sales monitors, has watered down the previously held bullish liquidity outlook. Such a development will work in favour of surplus units on the economy as they will continue to realise high returns due to the resultant high interest rate environment.
Furthermore, the noise that continues to surround the smooth sale of the Chiadzwa diamonds has served to maintain interest rates at their elevated levels. On August 16, the United States-based Rapaport Diamond Trading Network banned its members from dealing with Zimbabwe’s Marange diamonds despite the KPC certification.
The news increased uncertainty on the nation’s ability to derive maximum value from the diamond sales. Consequently, the market downgraded the economy’s liquidity outlook, thereby increasing expected returns from local money market securities.
In as much as the annual risk adjusted returns for available local money market securities for this year of 20 percent are lower than actual returns of at least 25 percent for last year, the current expected returns on the local money market are superior to those existing in regional and international markets.
Expected returns on the interest bearing market for South Africa, Botswana, Mozambique and Zambia are currently trading at below eight percent whilst those of the USA, UK and Japan are below four percent. The comparison makes the local money market one of the most competitive in terms of return.
The local money market has currently outperformed the returns from Zimbabwe Stock Exchange (ZSE) industrials and minings. As at yesterday , the industrial index had posted a loss of 13 percent whilst the resource index had shed about 31percent since the beginning of the year. Only fifteen counters out of a possible seventy six had a positive year to date performance, an indication of the inherent systematic risk that continues to weigh down the ZSE.
The mediocre performance by the ZSE has heavily penalised the passive investor, whose chance at the beginning of the year of picking a stock that would trade in the money as at yesterday stood at around 20 percent.
The current trading environment therefore does not encourage a buy-and-hold investment strategy on the ZSE due to persistent downside risks that remain observable on the economy.
In other regional and international markets, yields on fixed income securities usually soften in response to increased demand for safety linked assets. This occurs when financial markets go through sustainable phases of risk aversion as indicated by depressed equities performance.
As for Zimbabwe’s case, the depressed yields for 2010 in comparison to those that prevailed in last year are largely as a result of the liquidity expectation theory rather than by increased demand for safety arising from diminished appetite for risk.
Whilst the market is expecting additional liquidity onto the economy from more Chiadzwa diamond sales, it is not our assertion that interest rates will “tumble” during the second half of the year as had been widely anticipated.
Evidence is available that there is astronomical demand for funding on the economy that is highly capable of sustaining interest rates on the higher side, despite some improvement of liquidity on the economy.
With deficit units apparently finding it so difficult to attract funding at the prevailing interest rates of around 12 percent-15 percent for ninety day monies, the current interest rates have to a large extend priced in the expected improvement in market liquidity. We therefore expect future improvement in market liquidity to stabilise interest rates at their current levels during the rest of the year, rather than to culminate in a significant decline in interest rates.
The skewed distribution of the available liquidity on the market at any given time during the rest of the year will further work to maintain interest rates at their current levels, a development that should keep expected returns on the local money market relatively high.
Year 2010 therefore could be another memorable year for investors on the local money market, who endured forgettable periods of hyperinflation, which at its peak, rendered their hard-earned savings worthless within a day.
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