THE money market rates have remained depressed, hovering around the 40 to 90% region resulting in persistent negative real interest rates.
The market has been per
sistently short during the week due mainly to the issuance of open market operations (OMO) paper. Liquidity, however, seems not to have much bearing on the interest rates direction, after the Reserve Bank of Zimbabwe (RBZ) directed that rates be linked to the inflation rate — in the 10 to 20 percentage points above the inflation rate.
As efforts to turn around the fortunes of the country continue, the central bank has come into the market seeking to raise $500 billion through a five-year parastatal and local authorities re-orientation programme stock which opened on February 21 and scheduled to close on February 28.
The stock is offered at a floating rate linked to the CPI with semi-annul payments. The $500 billion is part of $10 trillion to be raised for the reform of parastatals and local authorities.
The bond has a prescribed and liquid asset status, and is acceptable as collateral for repo and overnight accommodation by the RBZ.
The CPI-linked bond, whose rate will be the average inflation rate for the six months preceding the month in which interest is paid, exclude the month immediately preceding the month in which interest is due.
The benefits for investing in the bonds include the fact that if interest rates were to rally, the investor has some money locked in for the long-term. If interest rates “back up”, the investor has money coming due in the short-end that may be reinvested at higher interest rates.
Generally, investors expect to earn more for a longer holding period, thus the yield curve should reflect expectations about where interest rates and inflation are headed. With the inflation rate anticipated to continue to decelerate, interest rates are accepted to come off from current levels.
In the absence of short-term dated paper, bonds are likely to become a more lucrative form of investment for long-term investors, if the inflation targets set for the next five years are attainable. The bond is anticipated to receive institutional support especially for those seeking assets for regulatory conformity, namely prescribed assets.
The broader markets eagerly await the direction of the repo rate in early March, which has been anticipated to come down given the significant slowdown in the inflation rate in 2004.
However, since the year-on-year inflation rate increased slightly for January the anticipated rate cut might be delayed. The y-o-y inflation rate come in at 134,6% up from 133,6% as recorded in December 2004. That said, the 20% to 30% inflation rate target by December by the central bank might be too demanding given the inflationary pressures compounded by the reduction in projected forecasts from the agricultural sector.
Of late the ZSE has been trading sideways underpinned by profit taking in some counters as the markets are gripped by uncertainties ahead of the general election penciled for March 31.
Some of the heavyweight caps like PPC, Old Mutual, Innscor and Cottco have drifted lower pushing the industrial index down from a peak of 2 370 901,67 points recorded on February 11 to the current levels of around 2 147 988,93 points.
The reporting season is already upon us with more companies expected to release results in the coming week. Most of the results are less than inspiring, reflecting the tough environment the business fraternity is operating in.
The main challenges being the ever-spiraling local costs — mainly utility, in some cases exacerbated by labour, foreign currency shortages, depressed demand capacity and under utilisation.
The current topsy-turvy markets present opportunities for long-term investors. Over the next months, as opportunities such as the exaggerated sell-off of some counters present themselves, investors should slowly work their way back into the market.
Many of the stocks have high risk or speculative ratings, hence “cherry picking” only a couple of names could result in meaningful and unintended price volatility. Use any short-term weakness as an opportunity to add to existing long positions or to buy into long positions in quality stocks. — Own Correspondent.
* Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates.