WEEKLY MARKET WATCH: Inflation disguised

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    Equity Axis

    Equity Axis Zimbabwe

    What made headlines in the week

    Zimplats surrenders claims to government ….

    In a positive indication, the country’s largest platinum miner Zimplats said it has agreed to cede a contentious piece of land that it has for years suffered to retain after the government had sought to take it over. Zimplats, majority owned by Implats and listed on the ASX, is the country’s largest mining operation, which gives it much international and domestic spotlight. The company has an annual turnover of $512 million and mines 7 million tonnes of ore annually. Although cases of compulsory acquisition abound elsewhere in Zimbabwe, the amicable resolution of the outstanding position between the 2 parties helps reduce the country’s risk profile. It is however not known at this point whether the outcome was a zero-sum, in that government may have coerced Zimplats into submission or the compromise was a win-win. Recent cases such as the Chiadzwa debacle over the diamonds claims, which is presently heavily contested in the courts, taints the ability of the country to adhere to international investments standards which spook potential investment flows. Government is encouraged to be more thorough in crafting investment policies to foster consistency and minimise uncertainties.

    Inflation disguised …

    Official inflation numbers released by the state organ ZIMSTAT shows a stable year on year outturn in the month of August. Annual inflation came in at 0.14% which is unchanged from the prior month. Inflation has trended downwards for 2 consecutive months between June and July before stabilizing in August. Prior to that, inflation trekked northwards evading deflation in February and maintaining upwards trajectory up until May. Despite the stable outturn, which factors only the formal markets component, inflation is widely believed to have spiked by a huge margin. Looked at inversely, the purchasing power of the consumer has eroded drastically due to the obtaining discounts prevalent in the market. Retailers and suppliers of a broad set of products are differentiating prices according to modes of payment. For those with stable standard rates, the ticker price would have already been adjusted for the market vagaries mainly factoring the replenishment cost. Retailers and producers are factoring the cost of buying cash from the street, which of course is not a conventional practice, but the only practical alternative given the growing forex allocation queue at the RBZ. This cost is thus passed on to the consumer and this is true for imported products. To demonstrate how dire the position is for nearly every dollar in imports the country earns an equivalent 54c in exports. Essentially this means we import almost twice as much we export in value terms and if the status quo remains it implies the market price disparities will widen in turn increasing the real inflation in the economy.

    ZSE stock remains buoyant…

    In the week the stock market rallied strongly earning a staggering 40% week on week to a record best level. The stock market is now on course to touch the $10 billion mark having opened the year at around $4 billion. A total of 53 stocks from the active 59 counters on the ZSE, have gone up since the beginning of the year and among these are all the heavy cap stocks including Delta, Econet and Old Mutual. Old Mutual which is often used as a barometer for implied rates, is trading at a premium of 110% to LSE, an almost similar premium to dual listed PPC. The market may, however, begin to stabilize around the $10 billion mark, although we expect it to keep going up at much slower rates. The pace at which the stock market is rising reflects investor hysteria and severe panic over the envisaged economic situation other than the search for capital gains. The gains will not be premised on any calculable and justifiable valuations, but pushed by the increased risk in alternative asset classes.

    PPC, a target for takeover

    PPC remained in the news as increased interest from possible suitors was shown in the week. In the prior week, Fairfax of Canada had indicated its willingness to acquire a substantial portion of the company’s issued share on the condition that PPC accepts a proposed merger with Afrisam, a rival South African competitor. PPC said it was considering the offer although initial indications showed that the company felt undervalued. In the week under review Africa’s largest cement producer Dangote joined the race, signaling an interest in snapping the entire issued shares of the JSE and ZSE listed cement maker. PPC is presently valued at close to $750 million. Elsewhere listed companies Rio Zim, Proplastics, FML and FM Properties released their interims. Rio Zim and Proplastics recorded a sharp surge in profitability driven by increased sales volume as the former rode on a Dalny mine acquisition while the later capitalised on SI64. FML saw its bottom line swell as investment gains countered losses in the core business. Claims sharply went up while the ZSE gains propelled the net investment income. FMP formerly Pearl Properties saw its topline position weaken impacted by lower rentals. More companies will release their interim financial results in the coming weeks.

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