Poor appreciation of capital markets slows growth at USE

At the announcement of Umeme as the biggest trading counter for the January to April quarter of 2019, Umeme board Chairman Patrick Bitature wondered why despite declaring a big profit and a fair dividend, the share price hardly moved. This was similar in the case of Stanbic.
“That is a question we must find an answer to,” Mr Bitature said.
In simple terms, the stock market has an important role in allocating resources in the economy, both directly as a source of funds and as a determinant of firms’ value and borrowing capacity.
In the capital market, companies list shares of their stock on the securities exchange or stock exchange to raise money that they need to grow their business. Investors often purchase those shares. Investors buy and sell the stocks they have bought among themselves in the secondary market, and the exchange tracks the supply and demand of each listed stock.
Unfortunately, in Uganda, the capital markets industry is still at its nascent level characterised by the low level of Initial Public Offers leading to fewer companies listed on the stock exchange. The industry is also characterised by low liquidity because of low volume trade at Uganda Securities Exchange (USE).
In this article, Prosper Magazine has explored why there are always low corporate activities in the stock exchange causing what may be termed as a “drought” at the Uganda Securities Exchange (USE).
In an interview with Prosper Magazine last week, the chief executive officer of Capital Markets Authority, Mr Keith Kalyegira said there is a heavy reliance on banks as a financing mode for industry captains in the country because they have not appreciated the importance of patient capital available in the capital markets.
“They have not appreciated the pension funds available in the capital markets which is patient capital and it is cheap for raising the capital that they (practitioners) need for financing and expanding of their enterprises,” he said.
Mr Kalyegira said the captains in the industry in Uganda still have low appetite of raising capital through the capital markets. That is why there are still few companies listed on Uganda Securities exchange.
He said one of the dangers associated with overreliance on banks, as the source of capital is they are expensive in a way to the industries and there are low levels of mobilising domestic savings in the economy, adding that they are expensive because of high-interest rates charged and the loans are on a short-term basis.
“The problem with overreliance on banks for capital is it will always constrain profitability and employment rate in the country. Heavy reliance on banks is good for traders but not for industry practitioners; the best sources of capital for them is patient capital through the capital markets,” he said.

Instruments
The stock market has a mix of instruments such as stocks (equities), corporate bonds or treasury bonds.
Stocks and bonds represent two different ways for an entity to raise money to fund or expand their operations. When a company issues stock, it is selling a piece of itself in exchange for cash. When an entity issues a bond (corporate bond), it is issuing debt with the agreement to pay interest for the use of the money.
A person who buys a stock is, therefore, buying an actual share of the company, which makes him or her a part owner – however small. This explains why Stock is also referred to as “equity.”
Bonds, on the other hand, represent debt. A government, corporation, or other entity that needs to raise cash, borrow money in the public market and subsequently pays interest on that loan to investors.
Mr Kalyegira said there is a correlation between the stock markets and the debt market (government bonds) and that the activities in one-segment affect the other in the form of high yields or low yields for the case of bonds and for the case of equities low prices.

Government securities
In Uganda, government securities include treasury bills and treasury bonds which players in the capital market say affects the stock market because both of them compete for investors. Bonds are considered to be safe than the shares listed in the stock market.
The large existence of government securities in the market is because of large government fiscal deficit which often forces the government to issue securities in the domestic money market at higher interest rates, which attracts both domestic and foreign investors; in this scenario, there is always a drive away or a cause in investor shift whereby they (investors) move to instruments where returns or yields are high.

Benefits
The International Finance Corporation (IFC) explains that the value of capital markets have several beneficial features for different participants in the economy.
For a company or entity in need of funding, domestic capital markets provide an alternative source of funding that can complement bank financing.
The IFC further states that capital markets can offer better pricing and longer maturities, as well as access to a wider investor base. They can also offer funds for riskier activities that would traditionally not be served by the banking sector, and by doing so contribute significantly to innovation in an economy. The end result is high domestic savings and high economic growth.

What affects a stock exchange?
Mr Kalyegira said the stock market in Uganda is at times affected by high yields in government securities, which is also a bank related activity.
“The yields (interest rate) in treasury bills and bonds have been high in Uganda, which has seen investors participating in government securities than in stock markets,” he said.
However, he said lately, there has been a decline in yields in government securities, which in a way result in investors reverting to invest in the stock market by buying shares of different companies listed on the stock exchange.
Stocks do well when the economy is booming (high GDP growth rate).
During this period, consumers are buying and companies receive higher earnings. When the economy slows, consumers buy less, corporate profit fall, and stock prices decline. That is when investors prefer the regular interest payments guaranteed by bonds.
However, Mr Kalyegira said Uganda’s economy has regained high growth rate compared to two years ago of low growth below its peers in the East African region.
“The economy is growing at an average of 6 per cent which is good for the stock market,” he said.

Improving stock market
Discussing what CMA is doing to have more companies listed on the stock exchange, Mr Kalyegira said CMA has designed a programme of resource persons approaching the companies that are capable of floating shares in the market.
“We began this programme of having resources persons a year ago, whereby they are having a face to face discussion with potential issuers of public instruments (shares/corporate bonds) in the capital markets.”
Mr Kalyegira added: “So far, we have engaged ten resource persons and they are interacting with potential issuers. Since the last year, they have had talks with 17 different boards of directors of big companies about the importance of listing shares or issuing bonds in the stock market.”
Where the stock market exists, brokerage firms also exist alongside them.
“Dealer” or “Stockbroking Firm” means a listed company constituted for the purpose of undertaking on his or her part as well as on behalf of the clients all transactions for which he or she is responsible in the course of exercising his or her function as a stocker broker.
Brokerage firms are also known as discount brokers as they offer trade transactions at a single price. They provide recommendations only on those investments that meet the financial goals and needs of a client.
A stockbroker provides advisory services for investing in a stock market and in return, an investor pays a fixed fee to them. The primary role of a stockbroker is to execute transactions on behalf of his or her clients by buying and selling securities in the stock market.
Broadly, the brokerage firms perform the role of providing research-based advice on stocks on different counters; they help their clients bit an individual or institutional investors to invest in alternative assets; subscribing to IPOs being floated and mutual funds schemes.
A broker or a brokerage firm makes or individual his or her fee from the difference between the prices at which he or her own account and the price at which he sells them to customers. The difference between the asked price and bid price by the brokerage firm is known as the spread and is the compensation for making a market in that security.
The capital industry in Uganda has seen two big brokers exciting the business (brokerage services) due to either competition of changing their line of the business model. These two firms were Merchant Bank of East Africa (MEBA) and the recent one African Alliance.

Exits
In relation to African Alliance exite, Mr Kalyegira said: “They contributed to stock development in Uganda because they were one of the pioneers in Uganda’s capital market. However, I don’t think that the exit of African Alliance will affect the activities in the stock market (Uganda Securities Exchange). It will have no fundamental impact on the stock exchange because their clients have been transferred to another brokerage company.”
Mr Kalyegira said African Alliance has retained their licence for advisory services, meaning they still play a role in the capital markets industry of Uganda in terms of advising on financial transactions.
He said trading activities at USE would continue normally without any disruptions because there are still brokerage firms.

Trading highlights
Statistics compiled by USE in the last four months indicate that equity turnover realised between January and April was Shs28.4 billion from the volume of 386.2 million shares.
Umeme, Baroda and Stanbic accounted for over 96 per cent of total turnover. The number of trades or deals was1,634.
There was no activity registered on the corporate bond segment at the USE during the period under review.
Foreign companies account for the majority of trades standing at 76 per cent on the market followed by local companies at 14 per cent as of the end of April 2019.
The executive director of Kinsma Advisory services, Mr William Nyakatura in an interview, said the financial results of 2018 have played a key role in reviving trading on some of the counters which are active.
“When you look at their financial results, they did fairly well and the dividend they have declared is also good especially Umeme,” he said.

Current market
Giving insights into the current market condition, Mr Nyakatura said it is a good time for both institutional and retail/ individual investors to buy because of the companies’ financial results are good and the share prices at the stock exchange is also still low.
“It is a nice time to buy stocks of the companies listed, given that the prices of stocks and the dividends are competitive and above the current inflation rate,” he said.
Mr Nyakatura said Uganda’s economic growth rate has picked up to around 6.3 per cent, which offers good investment opportunities for the various managers to invest the pension funds either in equities or bonds.
“When the economy is booming, it means there is money available for investment hence they have more money to allocate by investing in available instruments in the stock exchange,” he said.
In an interview last week, the chief executive officer Crested Capital, Mr Robert Baldwin, said it’s been a very dry market for more than a year.
“Turnover at the USE was down 55 per cent in 2018 and one trading participant recently pulled out of equities trading. However, the market started raining in April, attributed to the return of large investors to the USE and positive FY18 results from several listed companies. The proposed dividends from Umeme and Bank of Baroda were particularly encouraging,” he said.
The equity prices in most counters at the USE have continued to remain low with some dropping below the IPO price.
Mr Baldwin said: “I can’t speculate on prices. But Crested’s research models indicate there are many companies trading below projected target prices. These includes Umeme, which if you consider the dividend, is trading below its 2012 IPO price!”
As Uganda’s stock market continues to experience low listing activities, Mr Baldwin said the regulators should fast-track the approval of listing by introduction rules, adding that drafts of these have been languishing in “statutory purgatory” for some good time now.