If you are particularly a Ugandan in the diaspora or are aware of interest rates in markets such as the US and UK, you will know that the Bank of England base rate is 0.5%. The Fed rate in the US is currently 0.25%. This is the rate that basically determines commercial banks’ lending rates, and therefore the interest rates they pay on savings. The UK rate is not expected to change for say the next 3 years, that is until 2015, I expect the same for the US rate. So you can expect the interest you will receive on your savings be close to zero.
The search for investments that pay a “good” return never ends in these tough times. One option is to consider investing in stocks and bonds on the Uganda Stock Market (USE).
First, the basics of what stocks and bonds are and how the stock market works.
Inventory (using an example)
Stocks, also called stocks or shares, are a “portion” of a company’s capital stock that are offered to the public. If a company has, say, 1 million UGX in share capital and each share is worth, say, 1 UGX (nominal price), then there are 1 million shares. The company may choose to offer 20% of these shares to the public. In other words, it offers 200,000 shares to the public. However, it does not offer them at the nominal price, but instead issues them at 2 UGX each (thus at a premium).
As an investor, you could buy, say, 20% of the shares, ie (200,000 shares) at Shs 400,000 (UGX 2 x 200,000). You can then choose to sell these shares, say at 4 UGX each, thus for Sh800,000 and make a profit of 400,000 UGX. Buying and selling shares is really how the stock market works, it connects buyers and sellers of shares of a public company.
Bonds (using an example)
Just as stocks are a means for a company to obtain financing (since shares are generally issued at a premium), as in the example above, bonds are also another means for a company (or, for example, the government) obtain funding. The difference is that a stock gives you partial ownership in the company, while a bond is similar to a “promissory note”, in other words, the issuer of the bond (say, the company) promises to pay you at a future date (say 3 years) the principal amount of the bond (or the amount you are lending it to) plus interest.
So, a “UGX 1 Million 3 Year 10.25% Treasury Bond” means that the issuer of the bond (in this case, the Government of Uganda (GOU) will repay you in 3 years the principal of 1 million Shs., plus 10.25% interest). Interest is usually paid semi-annually.
Like stocks, bonds can be traded on a stock market. In other words, an institution like the National Social Security Fund (NSSF) will buy bonds during an auction, but will say that in the unlikely circumstance that you don’t want to hold the bonds during the maturity period, i.e. the 3 years, you can choose to sell their bonds on the stock market. The person buying the bonds will often buy them at a premium or discount (depending on market interest rates). If the investor buys the bond at a discount, it means that the investor pays less than the face value of the bond and will enjoy the interest on the bond for the remainder of the maturity period plus the discount on the purchase of the bond.
But what about investing in USE stocks and bonds?
USE and its “bull market” phase
The USE has only been around since June 1997 and is now in its 15th year. It’s still very much an emerging market, of course, compared to markets like the New York Stock Exchange (NYSE) which was formed in 1792, the London Stock Exchange (LSE) which was founded in 1801, and the London Stock Exchange. Tokyo Securities Exchange (TSE). ) ) in 1878.
However, this works in your favor. Emerging market stock markets often have significant rise/growth in the early years as they develop and as such are typically “bull markets” (a market where prices are rising or expected to rise) . USE’s All Share Index (ALSI) growth statistics; A measure of all publicly traded companies, for example, shows that share prices have been rising across the board, except in 2008, the peak of the credit crunch.
The bond market is also experiencing increased growth, with activity up 4% according to the 2010 USE annual report.
The above looks promising, is it worth investing in stocks and bonds through USE?
CONS FIRST (of course)
1. Low liquidity due to low trading volume
Despite the increasing activity on USE, since we are still an emerging market, trading volume is quite low and according to trading statistics, some stocks have no activity for a day or a couple of days.
This means considering investing in this especially for profit the focus should probably be on those stocks that have the highest trading volumes as you can expect them to be the most representative of an active market where you can buy or choose as you like. I wish without delay to find a seller or a buyer.
2. Foreign exchange losses (Forex)
A key consideration when investing in the US, especially if you are a Diaspora Ugandan, is to consider exchange rate movements. The shilling has depreciated over the last 5 years against the British pound (GBP) and the US dollar (USD) and so if you are investing in, say, a 3-year bond, you need to consider how it might move depreciation of the exchange rate and, therefore, affect the value of your investment.
AND NOW THE PROS
1. Good returns for stocks due to bull market trends
In light of the highlighted CONS, the clear advantage for the investor who has access to other stock exchanges but wants to invest in USE is to consider investing in short-term holdings of shares, that is, say a year before selling them as In a bull market (such as USE), stock prices are expected to rise.
2. No capital gains tax
One of the main advantages of shares is that no capital gains tax (CGT) is charged. Capital gains are the gains made when you sell shares at a higher price than you bought them for. Therefore, the investor can enjoy his profit tax-free. It is not uncommon to pay CGT in more developed economies.
Building on the above Pros, therefore, I summarize the financial model below.
- Initial capital (A): Shs. 18,931,650
- Profit per year (B): 12,586,182
- Other costs (C) (broker fees and Forex losses): Shs 1,145,357
- Return on Investment/Capital (years to recover capital) (A/ (BC)): 1.65 years
Now the basics you need to get right before you invest.
- It acts through a corridor. Since the clear winner is considering equity investments for a short time, it will most likely be necessary to have an investment broker who will provide regular reports and guidance so that you can carry out your buying and selling strategy. The Capital Markets Authority (CMA), the regulator of the USE, has a list of brokers, fund managers and investment advisers.
- Research. If you choose not to use a broker, the least you can do is thoroughly research information such as pricing and qualitative information about your target. Financial statements and press reports/stories give you an indicator of the nature of the entity. Of course, there is a limit to this research; past performance is not equal to future performance. Chances are your broker/advisor can also help you with this.
FINAL WORD
While you may not be a pro at the screaming auction system that USE uses, and considering you may not be interested in the intricate details of how stock markets work, there is definitely a lot of merit in investing in USE. considering that despite the CONS, like Forex movements, there may be returns in just over 1 year, which may be much better than investing in, for example, fixed savings accounts in the UK or the US. USA