Investors should first study trends

What you need to know:

  • A look at average returns of a three-year government bond from 2005 to 2006 (14.7 per cent), 2007–2008 (13.0 percent), 2010–2011 (10.3 percent), 2012–2013 (13.8 per cent), 2015–2016 (15.4 per cent) plus 2017 (13.1 per cent), reveals that interest rates were high during the periods before elections as BoU seeks to control inflation except for the 2010 to 2011 period, where the average interest rate was less by about 3 per cent.

Ugandans appreciate the importance of investing and even seek out new means of using money to generate returns and earn more money in the process. Unfortunately, that love for more money does not always culminate into making the best investment decisions and many times, an enthusiastic investor has been led astray.
Let us run down the clock to 2012 when a major international scam rocked Uganda through Telexfree. Hundreds of Ugandans relying on a promise of swift prosperity and a unique investment strategy were ripped of billions of shillings. It has now been five years or so yet it seems no lessons have been learnt. We continue to see several Ugandans injecting money in not researched investments and schemes.

This clearly shows a gap between knowledge of appropriate investment and saving vehicle opportunities. A lot should, therefore, be done to sensitise the public about safer investment instruments such as government bonds, bills and equities, among others, that allow investors the opportunity to take appropriate action in case of any losses. An analysis of inflation’s impact on interest rates, profit growth and the price/earnings ratio would help you to assess the appropriateness of the instruments.

Companies’ dividends and share prices will usually drop during periods of high interest rates because of low profits and increase during periods of low interest rates due to high profits. During periods of high interest rates, companies find it difficult to seek debt finance as lending rates tend to be high leading to high finance costs, lower sales, dividends and share prices.
According to Bank of Uganda (BoU) statistics, considering a four-year cycle, a year before elections and two years after, there are higher inflation rates during the two years after than a year before elections.
Inflation stood at 6, 8.5 and 4.8 per cent for the years 2005 to 2006, 2010 to 2011 and 2015 to 2016 respectively, while in 2007 to 2008, 2012 to 2013 and 2017, it stood at 9.1, 16.3 and 5.6 per cent respectively.

A look at average returns of a three-year government bond from 2005 to 2006 (14.7 per cent), 2007–2008 (13.0 percent), 2010–2011 (10.3 percent), 2012–2013 (13.8 per cent), 2015–2016 (15.4 per cent) plus 2017 (13.1 per cent), reveals that interest rates were high during the periods before elections as BoU seeks to control inflation except for the 2010 to 2011 period, where the average interest rate was less by about 3 per cent.
Therefore, investors willing to monitor such trends should be in position to benefit from such analyses while those who can’t, should consider investing through licensed entities that meet and have the required expertise as per the Capital Market Authority. An emphasis on the importance of the return of one’s money vis a vis the return on money, should be the basis for an investment.
George Jato Otim
[email protected]