How to price the Zimbabwe risk

 At the same time, BNC share price has in recent years plunged from highs of 10 cents a few years ago and has remained unchanged at 4 cents since beginning of the year.

Both companies have turned from loss making to profit in just under one year.

Without going into deeper fundamental analysis and despite BNC’s underlying issues, such a discrepancy may help to outline the important observation that buyers of the current market are momentum driven and not concerned with the fundamentals.

Treasury bills have also been unjustifiably neglected.

Perhaps I am too young to be assertive here, but for as long as I have followed markets, the Zimbabwe government is yet to default on local TBs.

Not because the State is a faithful borrower but that it always have means to either print the currency or make capital markets actors like banks and pension funds buy TBs to refinance maturing ones.

But more important than government’s “track record” one needs to assess the potential impact of TBs’ defaulting to understand the likelihood of that happening.

For example, if TBs were to default, some of the local banks will grind to a collapse and pension funds would fail to honour redemptions by retiring working men and women.

Consequently the whole ZAMCO programme would have been a self-defeating exercise – replacing an NPL with another NPL.

But again, the unthinkable has often happened in Zimbabwe.

The questioning of the risk attached to TBs holds water then prevailing discounts of up to 30% maybe the result of an excessively fearful market.

More glaring are cases where TBs have traded at double digit discounts weeks to their redemption.

If betting against the stock market (growth stocks and blue chips) is an informed strategy, perhaps it may be useful to think of holding TBs now.

In the event of a correction, some of the funds will rush out of equities into TBs and bank balances as the only near- liquid assets.

The result is a price appreciation from which holders of TBs can realise a return.

Continued next page

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