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First quarter of 2022 produces impressive results

First quarter of 2022 produces impressive results

Assessing the overall direction of the financial market is not an easy thing to do, however often at times the easiest ways that can be employed as a litmus test are quarterly reviews that assess three-month performance of markets.

As the first quarter of 2022 came to a close, we have seen different narratives taking form.

The first quarter of this year was a strong quarter for the stock market in Tanzania. The domestic equity index (TSI) registered 8.5 per cent growth (-1.32 per cent, Q1 2021) stocks registering enormous gains during thequarter were Tanga Cement +65.5 per cent, Nico+56.7 per cent, CRDB Bank +37.5 per cent, NMB Bank 35 per cent, Twiga Cement+20.6 per cent, DSE +13.8 per cent, DCB Bank +2.6 per cent.

Overall market turnover for the first quarter was 34.9bn/-.Leading the way was TBL registering a turnover of 15bn/-mostly through pre-arranged dealshence not affecting its market price.

Strong outlook on corporate profitability remains the key reason for stock market growth driving amassive buying spree in a number of counters.

During the period NMB and CRDB announced theirunaudited results for the year ending 31stDecember 2021. NMB reported 288.3bn/- cumulativeprofit after tax for the 12 month period representing a 37.3 per cent year to year growth, CRDB have reporteda greater growth in profit after tax for the same period reaching 267.5bn/- (165bn/-:2020) representing a 61.7 per cent year to year growth.

NICO released their audited financials for the year ending 31stDecember 2021 registering a profit after tax of 4.0bn/- (1.5bn/-:2020) which was 166.6 per centyear to year growth.

Tanga Cement annual results for 2021 caught the attention of many investors as it posted net profit for the first time in 4 years. The Group recorded a profit after tax of 3.5bn/- in

2021 compared to the loss after tax of 2.1bn/- in 2020.

The increase in profit was mainly due tothe increase in gross profit and decrease in foreign exchange and fair value losses which mainly relate to the US dollars denominated term loan.

Our view of the market remains bullish as we forecast the Domestic Listed stocks index (TSI) to gainmore points as we start quarter two, reflecting a “glass half full” outlook based on still-strong corporate sales and profit growth resulting from economic growth, measured inflation and low interest rates.

These factors suggest a favorable backdrop for stocks, with the potential for more subdued gains when we enter second quarter of 2022. More listed companies will release their 2021 audited financials andconsequently dividend calls scheduled for quarter 2 will increase stock prices.

During the quarter bonds had a mixed performance, diversified portfolio holders that included long termbonds had a good start to which strengthened first-quarter returns for diversified portfolios.

Yields fellacross the yield curve, albeit faster on the long end of the curve ultimately pushing bond pricessignificantly high. For investors looking to buy bonds the first quarter proved to be a painful one as lowyields meant cost for acquiring bonds was significantly high.

Quarter one had seven primary bond auctions four of the seven were long term bonds (15, 20 and 25). Investorscontinued to favor long-term bonds as all four auctions oversubscribed by huge bid to cover ratios.

Evenmore so investors seemed to repel from intermediate term bonds due to their relative illiquidity whereby all two auctions that were re-opened (5 year and 10 year) undersubscribed. The value of bonds traded during quarter one was 875bn/-, the 20 year Treasury bond was traded the most registering 200bn/- in secondary market trades.

Weekly Primary market updates

The Central bank was in the market on March 30, 2022 offering 112.5bn/- toinvestors through reopening a 10 year Treasury bond. The auction undersubscribedreceiving only a subscription rate of 44.4 per cent. Medium term treasury bonds such as the 10year are not preferred by investors given their relative illiquidity; most investors prefer bondsthat can be liquidated with ease.

We expected a slight repulsion from this auction compared to what we have seen on long term bonds, as total amount tendered was a mere 50bn/-, the minimum successful price printed at 99.4590 with 36 bids successful out of 56 bids placed by investors.

Consequentially, Treasury bond yields in the secondary market are expected to fall in the medium to short end of the yield curve, on account of sustained low yield pressures on thelong end of the curve, it’s unlikely that the trend will recede anytime soon with the currentaccommodative monetary stance by the central bank.

The Monetary Policy Committee (MPC) of the Bank of Tanzania willcontinue with that policy direction as disclosed in its recent bi monthly meeting.

Weekly Secondary market updates in the trading week ending April 1, the yields on government securities in the secondarymarket remained relatively unchanged with no significant primary issues affecting price.

Activities in the secondary market were moderate, in line with our forecast, the value of bonds traded slightly decreased by 28.9 per cent to 83.4bn/-from 117.44bn/- recorded in the previous week.

April 6, 2022 the BoT will be auctioning treasury bills, we expect yields tofurther fall only expecting the 364 and 182-day bills attracting subscription.

In the corporate bond segment only one NMB bond was traded at a size of 10m/-

Outlook

Equities

So far in 2022, we have seen a return to the equities market as a result of falling treasury yields.

This has coincided with a rise in the local equities market, which has seen the TSI index gaining 8.5 per centyear-to-date (YTD) with blue-chip stocks such as NMB, CRDB, Twiga and Tanga Cement gainingdouble digit price appreciation since the turn of the year as investors seek higher returns.

Theequity market’s resurgence has been fueled largely by falling fixed income rates, which haveresulted in a liquidity exodus to the equities market. Rates are expected to continue falling, positively impacting equities activity.

Fixed income

We foresee that yields on the long end to maintain current levels on the onset of the recentMonetary Policy meeting, whereby it was disclosed the central bank will continue implementing accommodative monetary policy for supportingbusinesses and investment for the remainder ofthe fiscal year 2021/22 however subject to the inflation path.

The central bank will suppress

Treasury bill yields further down as we have seen in recent auctions by borrowing less.

However, we expect a marginal upside risk to the inflation outlook as global fossil fuel pricesedge higher prompted by the ongoing Russia-Ukraine conflict, headline inflation edged lower fortwo consecutive months (Jan and Feb) but we expect cost push inflation to drive consumer priceindex higher in March and April driven by the sharper-than-expected oil price rise.

  • Mr Masumbuko is a Chief Executive Officer of Zan Securities—a capital markets and securities authority licensed dealer and a member of the DSE. raphael.masumbuko@zansec.co.tz
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