Are Uganda Stock Exchange (USE) stocks and bonds a good investment?

If you are a Ugandan in the diaspora or know 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 0.25%. This is the rate that basically determines the lending rates of commercial banks and thus the interest rates they pay on savings. The UK rate is expected to remain unchanged for, say, the next 3 years ie. by 2015, I expect the same to be the case for the US rate. Therefore, you can expect the interest you will earn on your savings to be close to zero.

In these difficult times, the search for investments that bring “good” returns is endless. One option is to consider investing in shares and bonds on the Uganda Securities Market (USE).

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

Actions (example)

Shares, also called stocks or shares, are a “part” of a company’s share capital that is offered to the public. If a company’s share capital is, say, 1 million UGX and each share is worth, say, 1 UGX (par value), then there are 1 million shares. The company can then choose to offer 20% of those shares to the public. In other words, he is offering 200,000 shares to the public. However, he doesn’t offer them at face value, but gives them out at 2 Ugin X each (so at a premium).

As an investor, you can buy, say, 20% of the shares, ie. (200,000 shares) for 400,000 sh. You can then sell those shares at say UGX 4 each, therefore for Shs 800,000 and make a profit of UGX 400,000. Buying and selling shares is exactly how the stock exchange works, it connects buyers and sellers of shares in a public company.

Bonds (example)

Just as stocks are a means of raising finance by a company (stocks are usually issued at a premium), as in the above example, bonds are also another means of raising finance by a company (or, say, a government). The difference is that a stock gives you a piece of ownership in a company, while a bond is like an “IOU”, in other words the issuer of the bond (say a company) promises to pay you in the future (eg 3 years from now) the principal amount of the bond ( or the amount you borrow) plus interest.

So “Uganda 1M 10.25% 3 Year Treasury Bond” means that the issuer of the bond (in this case the Government of Uganda (GOU)) will pay you back the principal amount of 1M shillings plus interest of 10.25% Interest is usually paid semi-annually.

Like stocks, bonds can be traded on the stock market. In other words, an institution such as the National Social Security Fund (NSSF) will buy bonds during the auction, but state that in the unlikely event they do not wish to hold the bonds to maturity, ie. 3 years, they can sell their bonds on the stock market. A person who buys bonds often buys them at a premium or discount (depending on market interest rates). When an investor purchases a bond at a discount, it means that the investor is paying less than the face value of the bond and will enjoy interest on the bond until maturity plus the discount to purchase the bond.

But what about investing in stocks and bonds on the EE?

USE and its “bull market” phase.

EGE has existed only since June 1997, and now it is 15 years old. Of course, it is an emerging market compared to markets such as the New York Stock Exchange (NYSE), which was established in 1792, the London Stock Exchange (LSE), which was founded in 1801, and the Tokyo Stock Exchange ( TSE). ) in 1878.

However, this works in its favor. Emerging market stocks often have significant gains/growth in the early years as they develop and are therefore typically “bull markets” (a market where prices are rising or expected to rise). USE Stock Index Growth Statistics (ALSI); a measure of all publicly traded companies, for example, shows that share prices have generally been rising, with the exception of 2008, when the credit crisis peaked.

The bond market is also experiencing increased growth, with activity up 4%, according to the 2010 UEE Annual Report.

The above seems promising, so should you invest in stocks and bonds through USE?

CONS AT THE BEGINNING (of course)

1. Low liquidity due to low trading volume

Despite​​​​increasing activity on the ETF, as we are still an emerging market, trading volume is quite low and some stocks, according to trading statistics, are effectively inactive for a day or several days.

This means that when considering investing in it, especially for profit purposes, the focus should most likely be on those stocks that have the highest trading volumes, as you can expect them to be the most representative of the active a market where you can buy or choose as you wish to find a seller or buyer without delay.

2. Currency losses (Forex).

A key point when investing in USE, especially if a Ugandan is in the diaspora, is to be aware of exchange rate changes. The shilling has depreciated against the pound sterling (GBP) and the US dollar (USD) over the past 5 years, so if you’re investing in say a 3-year bond, you need to consider how the exchange rate may fall and therefore , affect the value of your investment.

AND NOW THE PROS

1. Good stock returns due to bull market trends

In light of the highlighted CONS, a clear advantage for an investor who has access to other stock exchanges but wants to invest in USE is to consider investing in holding stocks for the short term, such as a year before selling them, like a bull market (as is the case with USE), stock prices are expected to rise.

2. No capital gains tax

One of the main advantages of shares is the absence of capital gains tax (CGT). A capital gain is the profit you make when you sell a stock for a higher price than you bought it for. Thus, the investor can earn tax-free income. It is not uncommon to pay CGT in more developed economies.

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

  • Start-up capital (A): Shs. 18,931,650
  • Profit per year (B): 12,586,182
  • Other expenses (C) (broker fee and Forex losses): 1,145,357 Sh.
  • Return on Investment/Capital (Years to Payback) (A/ (BC)): 1.65 years

Now the basics you should get right before investing.

  • Act through a broker. Since the clear winner is looking at equity investments for a short period of time, it is most likely necessary to have an investment broker to provide you with regular reports and recommendations so that you can implement your buying and selling strategy. The Capital Markets Authority (CMA), which regulates USE, has a list of brokers, fund managers and investment advisers.
  • Studies. If you decide not to use the services of a broker, the least you can do is to carefully study information such as prices and quality information about your target. Financial statements and press reports/stories give you an indicator of the nature of the organization. There is, of course, a limit to this study; past performance does not equal future performance. Your broker/advisor can most likely help you with this aspect as well.

FINAL WORD

​​​​​​While you may not be an expert in the open auction system that USE uses, and given that you may not be interested in the intricate details of how the stock markets work, there are certainly many advantages to investing in USE , given that despite the CONS like moving around in Forex, it is possible to make a profit in just over 1 year, which can be much better than investing in, say, UK or US fixed savings accounts.

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