Sectors that could make for good stocks

Uganda Securities Exchange (USE) recorded one of its best half-year performances since inception for the last six months to June 2014 and our outlook remains positive for the short six months to the end of this year and early next year. The stock market recorded a total turnover of Shs141 billion in the first half of 2014 compared to a turnover of Shs72 billion and Shs175 billion in the second and first half of 2013 respectively, reflecting good performance for the past three half years. However, in comparison to the half year performances of 2012, the immediate past three half year performances are excellent. The stock market recorded a turnover of only Shs19.5 billion and Shs20.4 billion in the first and second half, respectively.
The performance is due to the corporate actions among which was the listing of Umeme on the USE, increased foreign investor participation in the market and recovery of economies locally, regionally and globally. A corporate action is an event initiated by a public company that affects the securities (equity) issued by the company. Corporate actions ignite activity and price appreciations in most cases. Foreign investor participation increases competitiveness and liquidity on the securities exchange. As investors demand more of a given listed company, price appreciations are inevitable. This partly explains the capital gain of 49 per cent of the Umeme share since being listed on the USE on November 30, 2012. Apart from NSSF Uganda, which is the third largest shareholder in Umeme, the rest of the shareholders among the 10 largest shareholders are foreign. The other stocks with a large foreign shareholder base have continued to dominate activity on the Uganda securities exchange.

Other factors
Also, recovery of the economy locally, regionally and globally has also supported market activity. The economy has since shown signs of recovery having grown by 5.1 per cent for the financial year 2012/13 from a growth of 3.4 per cent in the financial year 2011/12. Based on the economic policy statement for August 2014, economic growth for 2014/15 is projected to be in the range of 5.5 per cent to 6.5 per cent. The recovery of the economy will directly and indirectly support gains on the stock market in the medium term.
Our first pick for the medium term outlook is the banking sector. There are currently three locally listed banks on USE. We currently recommend buys for all the three banks listed on the stock market.
Umeme has continued to rally up currently trading at Shs410 but having hit a high of Shs415 and we expect it to continue to rise based on the available high demand while supply continues to be limited. Secondly, Umeme is currently trading at a premium on the Nairobi Stock Exchange at Kshs18 an equivalent of Shs540. This compares well with the current price of Shs410 on the USE. However, the recent rally warrants a keen look at the stock (Umeme) before buying more of it as the recent rally could mean that it’s now expensive.
More on the medium term outlook, USE introduced trading by a Shs1 spread instead of the original Shs5 spread meaning that shares traded on the USE can be traded in multiples of Shs1 compared to the Shs5 as it has been. I believe this encourage more activity that has been limited by the Shs5 multiple movement in shares prices. The original Shs5 multiple movement would mean a huge percentage change in price and therefore value for portfolios heavily invested in shares with low figured prices. A movement of Shs5 up or down on a stock priced at 20 would be an equivalent of 25 per cent change compared to the introduced movement of Shs1 up or down on a stock priced at the same price which would be an equivalent percentage change of 5. Small anticipated changes are more per cent sustainable than large ones for risk management especially for funds with large portfolios.
Arthur Nsiko works in the Capital Markets department at African Alliance.