Is Investing in Stocks and Bonds on the Uganda Securities Exchange (USE) Good?

In particular, if you are a Ugandan in the diaspora or know the interest rates in markets like the US and UK, you know that the Bank of England’s base rate is 0.5%. The US Fed rate is currently at 0.25%. This is the interest rate that essentially determines commercial banks’ lending rates and hence the interest rates they pay for savings. The UK interest rate is not expected to change for the next 3 years ie until 2015, I expect the same for the US interest rate. You can therefore assume that the interest you receive on your savings will approach zero.

The search for investments with “good” returns is endless in these challenging times. One option is to invest in Uganda Securities Market (USE) stocks and bonds.

First the basics of what stocks and bonds are and how the stock market works.

Stocks (example)

Stocks, also known as stocks or equities, are a “piece” of a company’s share capital that is offered to the public. For example, if a company has UGX 1 million in share capital and each share is worth UGX 1 (nominal price), for example, then there are 1 million shares. The company can then offer 20% of these shares to the public. So she’s offering 200,000 shares to the public. However, it does not offer them at the nominal price, but issues them at 2 UGX each (i.e. with a premium).

For example, as an investor, you could buy the 20% stake (200,000 shares) for Shs 400,000 (UGX 2 x 200,000). You can then decide to sell those shares at say 4 UGX each, for Shs 800,000 and make a profit of 400,000 UGX. Selling and buying stocks is really how the stock market works, connecting buyers and sellers of stock in a public company.

Bonds (using the example)

Just as stocks are a means of raising funds for a company (since the stocks are usually issued at a premium), as in the example above, bonds are also another means of raising funds for a company (or let’s say the government). The difference is that a stock gives you partial ownership of the company, while a bond is similar to an “IOU,” in other words, the bond issuer (e.g., the company) promises to pay you back at a later date (e.g., the company). The principal amount of the bond (or the amount you lend) plus interest.

A “3 year 10.25% Treasury bond of UGX 1 million” therefore means that the issuer of the bond (in this case the Government of Uganda (GOU)) will give you the principal of Shs 1 million plus interest in 3 years 10.25% will repay. Interest is usually paid semi-annually.

Bonds can be traded on the stock exchange like stocks. In other words, an institution like the National Social Security Fund (NSSF) buys bonds during an auction but says that in the unlikely event that they don’t want to hold the bonds for the term, i.e. the 3 years, they can sell the bonds on the stock exchange. The person buying the bonds often buys them at a premium or discount (depending on market interest rates). If the investor buys the bond at a discount, they pay less than the face value of the bond and benefit from the interest on the bond plus the discount when buying the bond for the remainder of the term.

But what about investing in USE stocks and bonds?

USE and its “bull market” phase

The USE has only existed since June 1997 and is now in its 15th year. Of course, it’s still an emerging market compared to markets like the New York Stock Exchange (NYSE) founded in 1792, the London Stock Exchange (LSE) founded in 1801, and the Tokyo Stock Exchange (TSE) in 1878.

However, this works to his advantage. Emerging market stock markets often experience significant rise/growth in the early years of their development and are therefore typically ‘bull markets’ (a market where prices are rising or expected to rise). The statistics for the growth of USE’s All Share Index (ALSI); For example, a measurement of all publicly traded companies shows that stock prices have generally risen, with the exception of 2008, at the height of the credit crunch.

The bond market is also experiencing accelerated growth with activity up 4% according to the 2010 USE Annual Report.

The above seems promising, so is it worth investing in stocks and bonds through USE?

FIRST THE CONS (of course)

1. Low liquidity due to low trading volume

As we are still an emerging market, despite the increasing activity on the USE, trading volume is quite low and some stocks are actually not active for a day or more based on trading statistics.

This means considering investing in these, particularly for profit purposes, the focus should most likely be on the stocks that have the highest trading volume as you can expect these to be the most representative of an active market in which to buy or can choose at will desire without time delays in finding a seller or buyer.

2. Foreign exchange losses (Forex).

An important consideration when investing in the USE, especially when a Ugandan is in diaspora, is to consider exchange rate movements. The shilling has depreciated against the pound sterling (GBP) and the US dollar (USD) over the last 5 years. So if you’re investing in a 3-year bond, for example, you need to consider how currency depreciation moves might affect the value of your investment.

AND NOW THE PROS

1. Good returns for stocks due to bull market tendencies

Given the CONS highlighted, the clear benefit for the investor who has access to other exchanges but wants to invest in USE is to invest in stocks for the short term, i.e. let’s say a year before selling as in a bull market (as in USE ), share prices are expected to rise.

2. No Capital Gains Tax

One of the main advantages of stocks is that there is no capital gains tax (CGT). Capital gains are the profit made when you sell stock at a higher price than you bought it. The investor can thus enjoy his profit tax-free. In more developed economies, it is not uncommon to pay CGT.

So, based on the above pros, I summarize the financial model below.

  • Seed capital (A): Shs. 18,931,650
  • Profit per year (B): 12,586,182
  • Other Charges (C) (brokerage fees and foreign exchange losses): Shs 1,145,357
  • Return on Investment/Capital (Years Returned Capital) (A/ (BC)): 1.65 years

Now for the basics you need to know before investing.

  • Trade through a broker. Since the clear winner will consider stock investments for a short time, it will most likely be necessary to have an investment broker who will provide you with regular reports and guidelines so that you can execute your buying and selling strategy. The Capital Markets Authority (CMA), the regulator of USE, has a list of brokers, fund managers and investment advisors.
  • Research. If you decide against a broker, you can at least do extensive research for information such as prices and qualitative information about your destination. The annual accounts and press releases/reports give you an indication of the nature of the company. Of course, this research has a limit; past performance does not correspond to future performance. Your agent/adviser can most likely help you with this aspect as well.

LAST WORD

While you may not be a pro at the open cry auction system that the USE uses, and considering that you may not be interested in the intricate details of how the stock markets work, there are definitely many benefits to investing in the USE , considering that this is nonetheless DISADVANTAGES like forex moves, there can be returns in just over a year which can be a lot better than investing in say fixed savings accounts in the UK or US.