Monetary policy and the Zimbabwe stock market

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HARARE – One of the roles of the Reserve Bank of  Zimbabwe (RBZ) is to help the Zimbabwe economy operate effectively.

This is done through the monetary policy, which is the process to control the money supply in the economy by making interest rate decisions to achieve higher economic growth and maintain price stability.

The monetary policy is to address the management of money supply and interest rates to achieve macroeconomic objectives like controlling inflation, growth, liquidity, and consumption. In short, the monetary policy is specifically designed to maintain the economic stability of the country.

As a result, the central bank has a lot of power to influence the economy, and this indirectly impacts how stocks move. While the stock market is not the economy, it can be seen as a reflection of how confident consumers are about the strength of the economy now and in the future.

Interestingly, the stock market can be used by both those who are confident (for good returns) and those who are fearful (as a hedge).

Additionally, the stock market is a helpful indicator of economic change, well-being and growth. As a result, investors should keep a close ear to news coming out of the RBZ as a gauge to where the markets might be headed next. This past Monday, the apex bank released its 2022 Monetary Policy Statement. There was no major shift in policies that were already in place. For example, interest rates were maintained at previous levels.

The Bank policy rate and the Medium Term Accommodation (MBA) Facility interest rate were maintained at the previous levels of 60 percent and 40 percent, respectively.

Focusing on interest rates is a great way to understand how the stock market moves. Knowing the relationship between interest rates and sectors can help investors understand why certain stocks are performing better than others.

The biggest impact of the interest rate on the stock market is on the intrinsic value of stocks. Not only do higher interest rates reduce the intrinsic value of the stock, but reduce the value of future cash flow.

Further, when interest rates are lower, as they are now, it is cheaper to borrow money.  This means consumers are able to purchase big products and services like major appliances among others.  When that happens, the big companies will have increased earnings which will boost the intrinsic value of stocks, and vice-versa.

What this also means is that if the stock market trend, which is currently positive, was a result of the prevailing interest rates, then it will likely follow the same path going forward. But if the stock market was on its upward trajectory, in anticipation of a shift in interest rate policy shift, then we should expect a reversal of the trend.

Inflation erodes not only earnings of listed firms, but erodes the capital gains made. Post the MPS, the stock market has since reached an all-time high. At a market cap of more than $1,6 trillion as of Wednesday, the market is now valued at US$13,5 billion using the official exchange rate and US$7,2 billion using a parallel market exchange rate of 220.

The Inflation outlook is also another factor to consider when investing in the stock markets.  The central bank has forecast month-on-month inflation to be reduced to below 4 percent in the first quarter of the year and to average below 3 percent in the second half of 2022.

This path is expected to reduce the country’s annual inflation rate to a range of 25-35 percent by end of December 2022. Given that in 2020, the RBZ started with a year-end inflation target of 10 percent, but later revised several times to end at 60,7 percent, chances are that inflation will once again miss the set targets and close upward of 60 percent. Investors would seek to use stocks as a hedge against inflation.

Another policy measure announced in the latest MPS is the downward review of the quarter-on-quarter reserve money growth target from 10 percent to 7,5 percent for the quarters ending March and June 2022.

The plan here, according to the RBZ, is to “sustainably anchor inflation expectations and curtail the speculative demand for foreign currency which has exerted pressure on the exchange rate and prices since the last quarter of 2021”.

This has always been the intention with the previous monetary targeting framework which however failed to bring exchange rate and price stability. Excess liquidity and the resultant inflation and currency depreciation saw investors turning to the stock market in the last two years.

As a result, the stock market rallied, and valuations kept elevating. Investors got more than just hedging but got very good returns. More of the same is expected post the latest MPS if money supply growth is not curtailed fully.

The MPS also acted to boost export earnings by allowing exporters in the manufacturing, tourism and horticulture sectors to retain 100 percent of their incremental export receipts.

On account of the high import requirements embedded in the manufacturing, horticulture and cross-border transport sub-sectors of the economy exporters in the manufacturing, horticulture and cross-border transport sub-sectors are now eligible to retain 100 percent of the incremental portion of their export receipts.

ZSE listed stocks set to benefit include exporting manufacturers such as Hippo, starafrica, Dairibord, Edgars’ Carousel Clothing factory, Innscor, Proplastics, and horticulture firms Tanganda and Ariston.

Also to benefit from increased retention levels are players in the tourism sector. In order to respond to the adverse effects of Covid-19 on the tourism sector, which was hard-hit by the pandemic not only in Zimbabwe but the world over, the RBZ allowed players in the tourism and hospitality industry to retain 100 percent of their foreign currency earnings to allow them to quickly recapitalise and procure the necessary goods and services required by tourists and travellers.

Listed hotel operators African Sun and RTG will benefit from this move and investors are likely to keep a keen eye on developments.  Some will take long term positions.

EcoCash Holdings’ performance has been hamstrung by transaction limits imposed by the central bank. However, the company is certain to benefit from the 25 percent and 50 percent upward review of mobile banking transaction limits.

Source: Business Weekly