Richard Byarugaba, chairman of the Uganda Securities Exchange. He says that delisting Umeme from the securities exchange could dampen market activity. PHOTO/FILE
Briefly paint a picture of the investment climate during an election Year at the Uganda Securities Exchange.
We have known for a long time that the election is coming, what happens is that the market prices and election risk in its price. This implies that you will see that price in things such as exchange rates, equity stocks, bond prices, and real estate. For example, they will want to protect themselves in case of inflation.
You might see the price of land and buildings increase, and you might see the price of bonds go up. If interest rates go down because there is an inverse relationship between interest and the price of bonds. But also, you might see the actual inflation hitting some of your liquid assets.
Therefore, these risks have been written into the market and the prices. When trading, make sure that you are not overpaying for an asset now to hedge yourself during this period.
What is the impact of elections on the stock market, and what are the securities exchange mitigation strategies?
Stock market performance is heavily influenced by market sentiment. Factors like demand and supply of stocks and the performance of the underlying companies also play crucial roles. Typically, stock performance tends to improve when expectations of company growth are high. Given the upcoming elections, many transactions reflect investments that have already been priced in, as Ugandans are aware of the five-year election cycle.
Various factors can further influence market dynamics. Elections usually generate a surge in liquidity, which can lead people to invest, though much of this liquidity may flow into bond markets rather than equity markets. Additionally, there's an oversupply in the real estate sector, prompting international investors to favor bond investments for better returns. Nevertheless, the stock market is likely to maintain its performance.
The most significant event affecting the stock exchange will be the delisting of Umeme once its concession ends and the government compensates shareholders. This will reduce the volume of stocks traded and may dampen market activity. Much of this potential decline has already been factored into the pricing, and the elections should not drastically impair stock exchange performance.
What new investment products are being introduced to improve investment visibility within the securities exchange, especially in light of the challenges posed by the election year?
We recently held a meeting with key stakeholders, including brokers, fund managers, and regulators from the Capital Market Authority (CMA), to improve the stock exchange's performance, increasing turnover, and introducing more innovative investment products.
One potential new product under consideration is Exchange-Traded Funds (ETFs), specifically focused on foreign securities. While the product is still awaiting approval from the regulator and the Uganda Securities Exchange (USE), it is expected to enhance the existing offerings. ETFs could provide better options for fund managers, pension funds, and institutions like the National Social Security Fund (NSSF), who seek greater exposure to equity markets.
Additionally, these new products aim to boost market liquidity, especially since company listings on the exchange have been limited. While MTN and Airtel have listed, the new offerings could help attract more companies and improve overall market dynamics.
What is your perspective on the state of the country's stock market compared to those of neighbouring countries?
Last year, the stock market performed very well, with the All Share Index (ALSI) growing by over 30 percent, indicating strong stock value growth. Notable performers included MTN, Umeme, and several banks. In comparison to other East African markets, our stock market ranked second in performance.
However, this year, we anticipate the delisting of Umeme, which may impact market turnover.
Despite this, we remain optimistic that overall stock market performance will not be significantly affected, as we expect continued capital gains from well-performing companies and a stable economy.
Inflation remains a concern, especially during election years when market liquidity tends to increase, potentially triggering inflation. However, the Central Bank has effective tools, such as adjusting the Central Bank Rate (CBR), to manage inflation by tightening liquidity and making borrowing more expensive.
With the recent listing of MTN and Airtel on the stock exchange, many Ugandans may be hesitant to invest in stocks. What are your thoughts?
Ugandans need to look at the portfolio. You know the adage: Do not put all your eggs in one basket! So, most Ugandans, when they think about investment, think about land. When they want to become sophisticated, they go into bonds, but there are several companies offering unit trusts, which might also be a bond in the background or an equity in the background.
Then, equity becomes another opportunity. If then you got your portfolio, you have been able to build as a person; it is good to build real estate (a house or rentals); the other thing you would like to have is a little bit of equities—which equities give you long-term growth and also protect you against inflation because these are companies that are doing business—they can increase their prices, and therefore their returns to their shareholders increase through dividends and also through capital appreciation.
For any Ugandan, start on your investment journey. Look at it as if you are building your portfolio not only with real estate but also including equities because it gives you something else. It also includes bonds because it gives you a little bit of liquidity, but it also gives you a little bit of regular cash, especially if you are in a place where you are not getting regular cash.
If you have your real estate for the long haul and inflation, have your equities for the capital appreciation of the companies that are working for you, and have a little bit of bonds so that you can get cash because it comes if you are getting what we call coupons, they come twice a year, and therefore, if you have good maturity of bonds, you can have cash throughout the year to support you.
What are your final remarks regarding investment and this being an election year?
To the investor, do not put all your eggs in one basket. Real estate is great, but diversify: Get a bit of bonds and equity in your portfolio. In an election year, there is a possibility and high risk of inflation. Therefore, you don’t want to have a lot of your money in the bond because it is directly hit by inflation. You would like to put some of your money in equity and real estate to cover yourself.
