Is Investing in Shares and Bonds on the Uganda Securities Alternate (USE) Any Good?

If you’re notably a Ugandan within the diaspora or have consciousness of the rates of interest in markets such because the US and the UK you’ll know that the Financial institution of England’s base price is 0.5%. The Fed price within the US is presently 0.25%. That is the speed that principally determines lending charges by industrial banks and thus the rates of interest they pay on financial savings. The UK price isn’t anticipated to vary for say the following 3 years i.e till 2015, I anticipate the identical for the US price. You’ll be able to due to this fact anticipate that the curiosity you’ll obtain in your financial savings will likely be near zero.

The seek for investments paying a “good” return is unending in these difficult occasions. One possibility is to think about investing in shares and bonds within the Uganda Securities Market (USE).

First the fundamentals of what shares and bonds are and the way the inventory market works.

Shares (utilizing an instance)

Shares additionally known as shares or equities are a “slice” of the share capital of an organization which might be provided to the general public. If an organization has say UGX 1m in share capital and every share is say value UGX 1 (nominal value), there are due to this fact 1 million shares. The corporate can then select to say provide 20% of those shares to the general public. It in different phrases affords 200,000 shares to the general public. It nevertheless doesn’t provide them on the nominal value however points them at UGX 2 every (thus at a premium).

As an investor, you could possibly purchase say the 20% of the shares ie (200,000 shares) at Shs 400,000 (UGX 2 x 200,000). You’ll be able to then select to promote these shares say at UGX 4 every therefore for Shs 800,000 and make a revenue of UGX 400,000. The sale and buy of shares is actually how the inventory change works, it connects patrons and sellers of a public firm’s equities.

Bonds (utilizing an instance)

Identical to shares are a method of an organization elevating financing (as normally the shares are issued at a premium) as within the above instance, bonds are additionally one other technique of an organization (or say authorities) elevating finance. The distinction is {that a} share provides you half possession within the firm whereas a bond is just like an “IOU” in different phrases the issuer of the bond (say the corporate) guarantees to pay you on a future date (say 3 years) the principal quantity of the bond (or the quantity you’re lending it) plus curiosity.

A “3 yr 10.25% Treasury bond of UGX 1m” due to this fact implies that the issuer of the bond (on this case the Authorities of Uganda (GOU) will in 3 years pay you again the principal of Shs. 1M plus curiosity of 10.25%. The curiosity is normally paid semi yearly.

Identical to shares, bonds may be traded on a inventory market. In different phrases an establishment equivalent to Nationwide Social Safety Fund (NSSF) will purchase bonds throughout an public sale however say within the unlikely circumstance that they don’t want to maintain the bonds for the maturity interval i.e. the three years, they’ll select to promote their bonds on the inventory market. The particular person buying the bonds will typically purchase them at a premium or low cost (dependent in the marketplace rates of interest). If the investor purchases the bond at a reduction, it means the investor pays lower than the face worth of the bond and can benefit from the curiosity on the bond for the remainder of the maturity interval plus the low cost on buy of the bond.

However what about investing in shares and bonds on the USE?

USE and its “bull market” section

The USE has solely been in existence since June 1997 and is now in its fifteenth yr. It’s nonetheless very a lot an rising market as in fact when in comparison with markets such because the New York Inventory Alternate (NYSE) which was fashioned in 1792, the London Inventory Alternate (LSE) which was based in 1801 and the Tokyo Inventory Alternate (TSE) in 1878.

This nevertheless works to its benefit. Rising markets’ inventory exchanges typically have vital improve/progress within the early years as they develop and as such are sometimes “bull markets” (a market the place costs are rising or anticipated to rise). The statistics for the expansion of USE’s All Share Index (ALSI); a measure of all the businesses listed on the change for instance exhibits that the share value has usually been rising apart from 2008 the height of the credit score disaster.

The bond market can be experiencing elevated progress and per the 2010 USE annual report the exercise elevated 4%.

The above appears promising so is it value investing in shares and bonds through USE?

FIRST THE CONS (in fact)

1. Low Liquidity owing to low quantity of buying and selling

Regardless of the rising exercise on the USE, as we’re nonetheless an rising market, the amount of buying and selling is fairly low and a few shares on the premise of the buying and selling statistics in truth haven’t any exercise for a day or couple of days.

This implies to think about funding on this, particularly for revenue functions, the main focus ought to more than likely be on these shares which have the best buying and selling volumes as you may anticipate these will likely be most consultant of an lively market by which you should purchase or select as you want with out time delays to find a vendor or purchaser.

2. Overseas Alternate (Foreign exchange) losses

A key consideration in investing within the USE particularly if a Ugandan within the diaspora is to present consideration to the change price actions. The shilling has over the past 5 years been depreciating in opposition to the pound sterling (GBP) and the US Greenback (USD) and due to this fact in case you are investing say in a 3 yr bond then you should take into account how the change price depreciation may transfer and thus have an effect on the worth of your funding.

AND NOW THE PROS

1. Good returns for shares owing to bull market tendencies

In mild of the CONS highlighted, the clear benefit for the investor who has entry to different inventory exchanges however who needs to put money into the USE is to think about investing in holding shares within the short-term i.e say a yr earlier than promoting them as in a bull market (as occurs with USE), it’s anticipated that share costs will rise.

2. No capital features tax

One of many key benefits of shares is that there isn’t any capital features tax (CGT) chargeable. Capital features are the revenue made while you promote shares at the next value than you obtain them. The investor can due to this fact get pleasure from their revenue tax-free. It isn’t unusual to pay CGT in additional developed economies.

On the premise of the Professionals above, I due to this fact summarise the monetary mannequin beneath.

• Begin up Capital (A): Shs. 18,931,650
• Revenue per yr (B): 12, 586,182
• Different prices (C) (dealer charges and Foreign exchange losses): Shs 1,145,357
• Return on Funding/Capital (years to get capital again) (A/ (B-C)): 1.65 years

Now the fundamentals you will need to get proper earlier than investing.

• Act by a dealer. Because the clear winner is contemplating fairness investments for a short time, it’s more than likely essential to have an funding dealer who gives you common experiences and tips so you may perform your purchase and promote technique. Capital Markets Authority (CMA) the regulator for USE has a listing of brokers, fund managers and funding advisors.
• Analysis. For those who select to not use a dealer, then the least you are able to do is analysis extensively on info equivalent to costs and qualitative info in your goal. The monetary statements and press experiences/tales provide you with an indicator of the character of the entity. There’s in fact a restrict to this analysis; previous efficiency doesn’t equal to future efficiency. Your dealer/advisor can probably provide help to on this side as properly.

FINAL WORD

While you might not be a professional on the open cry public sale system that the USE makes use of and contemplating you won’t have an interest within the intricate particulars of how inventory markets work, there may be undoubtedly plenty of advantage in investing within the USE contemplating that regardless of the CONS equivalent to Foreign exchange actions, there may be returns in simply over 1 yr which may be significantly better than funding say in fastened financial savings accounts within the UK or US.