Is Uganda’s stock market on verge of meltdown?

Despite the huge investment, the stock market hasn’t yet picked the much anticipated momentum to take off. Out of the currently 16 listed companies on the stock exchange market, just 8 are fully engaged into selling and buying of shares. Companies like Uchumi supermarket that closed down business in the Ugandan market are still listed on the Uganda stock market!Ideally, listed companies should have a good reputation in business. They must be profit making and above all should be well managed. The thinking is simple. Shareholders are more willing to invest in profit making ventures. Summit Business magazine also learnt that shareholders are paid dividends at the end of each financial year. The Board of Directors determine the amount to be paid out to each shareholder.

“It is not automatic that every financial year you will get dividends. The profits may be ploughed back into the company,” noted Joseph Lutwa, the Head of Business Development at Capital Markets Authority (CMA).

Currently, the Uganda Stock Exchange (USE) is operating 2 types of market segments; main market segment and the growth emerging market segment (GEMS). The main market segment is characterised by companies that have an audit trail of at least 3 years and above. They must have a share capital of Ugx1b and an equivalent asset base of Ugx1b.

The GEMS is still in its infant stage in the Ugandan stock market. For a company seeking this type of arrangement, it is required to present a good business plan, a good business story and a nominated advisor before the regulator; CMA. The regulator must first second the nominated advisor.

In most cases, the GEMS is mainly for start-ups. For example an I.T firm that has developed an antenatal system to help hospitals monitor expectant women. Unfortunately, the firm may not be able to raise the much needed financing for the completion of the project. Given the high demand for the software by hospitals, investors fund the project in anticipation of return on investment after project completion.

Acquiring stocks/ shares

In a typical market, you go directly to the vendor, negotiate prices and get your goods. However, trading in shares is a bit different. Shares are traded through stock brokers. Unlike the land or house brokers, stock brokers are licensed by the Capital Markets Authority and must meet a certain criteria. Their main purpose is to analyse the prospectus of particular companies listed on the stock market. Then, advise on which company to invest in depending on one’s investment needs, the period for which they want to invest.

Companies operations behave differently. They operate in varying industries, generate different returns which trickle in at different times. The broker looks at all these factors and is able to recommend the best company one can invest in their money.

The minimum number of shares one can buy is 100. If you are to invest in Uganda Clays for example which is trading at Ugx24, all what you need is just Ugx2400! Besides this, you will incur a 2% commission to the brokerage firm.

Stocks;  worth investing in?

If you are looking for quick wins, try your luck elsewhere. The stock market is not like land where you buy and sell tomorrow at a relatively higher price. It takes time. Take the example of Umeme. The company came to the stock market in 2012. At the Initial Public Offering (IPO), each share at that time was costing Ugx245. If one bought 1000 shares, they invested Ugx245,000. Four years down the road, Umeme is trading at Ugx530. The investment has now doubled.

“While you can invest as low as Ugx 13,000, it is important to understand that if you are looking at making an investment, focus on how much you are putting in to get a reasonable return. The lower your investment, the lower your returns,” notes Charles Nsambya, Communications and PRO at CMA.

Are the arms of government at work?

CMA, the regulator is a government controlled entity. They regulate the stock market. CMA issues a trading license to the stock brokers. The field that CMA regulates has particular products. These are shares/ equities of private companies, investment schemes (unit trusts), corporate bonds – these are debts raised by private companies. In Uganda, they are no municipal bonds despite KCCA’s efforts to get financing through this arrangement.

On the other hand, there is the government as an issuer. Government issues securities through an agent who is the Central Bank. The Central Bank issues both short and long term securitiess.

Government borrows money by issuing instruments for short time and long term financing. These are called treasury bills and bonds respectively. However, the bonds can go up to 15 years. Treasury bills are usually issued to tackle short term financial pressures in the economy. This kind of arrangement is not necessarily regulated by the CMA.

An ordinary person seeking to buy treasury bills and bonds has to go through the Central Bank’s agents. These are called primary dealers. According to information obtained from inside sources in the Central Bank, they are only 6 licensed primary dealers. These include Stanbic bank, Centenary bank, DFCU bank, Bank of Baroda, and Crane bank. These transact on behalf of the Central Bank.

Stock market; in free fall?

There are many obstacles that are inhibiting the growth of Uganda’s stock market. The country’s biggest corporations in terms of the number of listed companies and market value are foreign based. They are likely not to commit such huge investment in an economy that is not showing signs of quick economic growth and development.

Trading in shares is less frequent, and when it happens, it is only limited to a few companies. Appreciation of the stock market is not high among the Ugandan populous. The general public does not have confidence in the integrity of the stock exchange. The Safari com saga in which Ugandan shareholders lost lots of monies is still fresh in most peoples’ minds.

The Ugandan business model is obvious. Most firms are family owned. It is therefore very difficult for such entities to get listed on the stock market and sell shares to the public. The difficulty in part arises to the rigorous requirement of having in place robust governance and transparency measures, a myth in many family controlled settings.

Another challenge is the lack of knowledge of the benefits of trading on the stock exchange. The regulator has tried to disseminate some knowledge on the stock exchange but with the limited funding, no much progress is made. This therefore presents a key obstacle to the growth of this sector.

March 20th, 2018 | by

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