Strong dollar, low activities weaken USE trading in first months of year

The weaknesses in Uganda’s economy, strong US dollar and lack of trading activities by the institutional investors have weakened the performance of Uganda Securities Exchange (USE) in the first two months of 2017.
Performance of the stock market is very important to investors and they react to macroeconomic variables which may affect the performance of the stock market. Interest rate, exchange rate and inflation are the key macroeconomic variables which affect the market.

The weak performance of the stock market is hitting the investors in form of low returns on their investments since the equity prices have dropped, while on the side of USE, the weak performance has affected the levels of turnover compared to last year during the same period.
In an interview with Prosper Magazine last week, the USE chief executive officer Paul Bwiso said the performance of the stock market in last two months has been weak due to risks in the market.

“In January last year we realised Shs27 billion, and this year in the same month we realised turnover of Shs9.4 billion. In February last year the turnover was Shs7 billion, and in February this year the turnover stood at Shs5 billion,” he said.

Institutional investors have a profound impact on stock prices because they account for most of the trading. Their buying can send a stock price up and their selling can send a stock price down.

Mr Bwiso said the institutions are not trading shares at the stock exchange leading to low activities in the market.
Explaining why there is low activity in the stock exchange, Mr Bwiso said that the risks are too much including the foreign exchange market; the strength of the dollar and its impact on the share prices; the economic growth which has been slower than expected; and the resurgence in inflation.

Mr Bwiso said: “Last year around the same time the Shilling was trading at Shs3,400 against the dollar but this time the Shilling is trading at 3,600 per dollar.”
Last month the Central Bank reduced Uganda’s economic growth rate to 4.5 per cent for this financial year ending June 30, 2017.

The case for GDP
Investors care about Gross Domestic Product reports because they provide the most comprehensive scorecard about the overall health of the economy. Since healthy economic growth helps boost corporate profits, over the long run, stock market performance tends to mirror economic performance.

A rapid increase in inflation also affects the performance of the stock market negatively. Growing inflation is considered as bad news by the investors because it depicts bad economic conditions in the country. This makes investors feel insecure about their investment in the stock market.

As a way of tracking development in Uganda’s capital market in the recent years, there was steady growth in terms of turnover. For instance, in 2016, the equity turnover realised throughout the year was Shs273.8 billion from 1.5 billion shares traded on the stock exchange.

USE explains that activity on the equity segment during the year was dominated by Umeme and Stanbic Bank Uganda accounting for about 93 per cent of the total turnover.

Statistics shows that the turnover grew by 46.2 per cent relative to a value of Shs187.3 billion that was realised in 2015. The volume on the other hand grew by 69.4 per cent relative to a volume of Shs889.9 million that was realised in 2015. The number of deals also grew by 18.11 per cent from 5,008 realised in 2015 to 5915 realised in 2016.
Meanwhile, trading in the cross-listed counters was generally weak with only Centum Investments and Equity Group Holdings Limited (EBL) registering activities.

Factors
The weak performance of the cross-listed companies was a result of poor performance of the Nairobi Securities Exchange (NSE) in 2016 since all the cross-listed companies trade their shares in the NSE, which has not been performing very well.

Contrary to what has happened in USE market performance, almost every stock market in the world was up in January, a bullish sign for the rest of 2017.

In stock markets, index is a very important element for both the investors and the fund managers. A stock index or stock market index is a measurement of the value of a section of the market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

Mr Bwiso said there has been a drop in All Share Index (ASI) from 26 to 30 per cent in cross-listed companies and 39 per cent portfolio with KCB and Equity Bank leading the way.

The manager trading at USE, Mr Andrew Mwima explained that the ASI opened at 1763.75 at the beginning of the year, declining for most of the first quarter, and later dropping to 1742.55 in March.
“The index rebounded modestly in the second quarter closing at 1763.51 in June before sliding to 1454.42 in September and closing at 1477.39 in December, an overall decline of 16.24 per cent. The LSI on the other hand, opened at 412.07 points at the beginning of the year, rose moderately to 424.5 in March at the end of the first quarter,” he said, adding: “The index then dipped to 397.34 in June and slid further to 389.09 before closing at 374.73 points in December at the end of the year; an overall decline of 9.06 per cent.”

Mr Mwima said the dismal performance of the ASI was attributed mainly to large declines in the prices of most cross-listed stocks especially large cap counters such as: NMG which lost 51.17 per cent of its value, KCB which lost 24.04 per cent, EBL which lost 19.18 per cent and East African Breweries which lost more than 10.26 per cent of its value during the period.

“The decline in the LSI on the other hand was mainly due to declines in prices of: Stanbic Bank Uganda Limited which lost 21.88 per cent of its price, Umeme which lost 22.22 per cent and New Vision Group which lost 10.07 per cent of its value during the period, among others. On the whole, 12 counters declined while four counters advanced in value,” he said.

Online portal
Last Tuesday, USE launched what it called an online customer self-service portal in a move that is expected to ease market information access to both local and international investors.
In an interview with Prosper Magazine, the chairman USE, Mr Charles Mbire, said with online services at USE market activities in the stock market will be boosted.

“Many people locally and internationally are going to begin accessing real time information about what is going on in Uganda’s stock market,” he said.
Head of global markets Stanbic Bank Uganda, Ms Anne Juuko, told Prosper Magazine that the new system will contribute to the growth of Uganda’s stock market. “Information is key to stock market development because activities in the market are driven by the available information,” she said.