As returns in stocks remain volatile, investors find refuge in govt debt

It is an undeniable fact that financial markets remain alien to many in Uganda. 

However, those who have taken trouble to understand them get addicted and will always look out for the best bet. 

Just like across the world, investors in Uganda’s financial markets continue to hedge their bets on government debt against illiquid and volatile stocks because the former  usually carries high interest and guaranteed returns. 

For instance, the decision by the central bank to increase interest through the Central Bank Rate, which rose from 6.5 percent in May 2022 to 10 percent in October of the same year to tame inflationary pressures that had risen above the 5 percent target to 6.3 percent, was a perfect boost for treasury bills and bonds, whose issuance increased by 76.4 percent to Shs4.3 trillion in the third quarter of 2023 from Shs2.4 trillion, according to data from Capital Markets Authority (CMA).

Government exchanged a portion of its maturing debt worth Shs446.73b for four more bonds with tenors ranging from three to 10 years after recognising refinancing risks associated with the expected bond recovery in the first quarter of 2024.

The decision to extend payment terms has been exploited by both institutional and retail investors, who have taken advantage to storm the bond market. 

As a result, the average yields on the five-year and 15-year bonds increased to 15.2 percent and 16.1 percent, respectively in the third quarter of 2023. 

“The increase in Treasury yields can be attributed to market sentiments, with expectations that government will increase domestic borrowing,” CMA noted.

However, while the bills market is making some goods returns, the securities market has been a hub of mixed activity. 

There has been genuine losses, caution, uncertainty and substantial rewards, all packed in one basket. 

Out of the 11 locally listed companies only four, including MTN, Umeme, Airtel and Stanbic declared dividends in 2023, which Delick Manishimwe, a research assistant at Crested Capital, says signals a difficult year in which the securities market was dry in terms of rewarding investors. 

Even those that paid dividends such as Umeme and MTN, have had a cut in the pay-outs compared to before. 

Many investors had been buoyed by the enthusiasm surrounding the post-Covid recovery but the anticipated returns have evaporated.

But the drama is understandable 

Market volatilities have persisted, foreign investors have fled to Western markets, which have high returns and threats resulting from the Ukraine-Russia and now Gaza conflicts continue to present challenges. 

These have continued to eat into bottom lines of some manufacturers such as Cipla Quality Chemicals, whose Indian-based mother company announced in April last year that it would take a strategic exit of its 51.18 percent stake in the Uganda subsidiary to focus its investments and operations in key markets that would give a good return. 

Cipla has struggled to give investors a return on their investments and continues to see its stock shade value, amid a mixed bag of financial results. 

Shareholders are concerned that the Cipla stock has lost 25 percent of its value since November last year, falling to just Shs52.5 at the close of the same year.  However, analysts still believe that Cipla is a good stock given its prospects and sustainable business model. 

Dreck Murozi, a research and market development officer at CMA, says investors in such stocks, must exercise patience to benefit in the long term. 

When Cipla was listed in 2018, its stock traded as high as Shs256.5 but has fallen to just Shs52.5 . 

But as the volatility continues in the stock markets, investors are trying their luck with regulated fund managers, whose assets under management rose from Shs200b to Shs4.8 trillion in September last year.  

“Since it can be hazardous to invest in specific stocks on its own, a lot of investors are placing their money in unit trusts,” Terrence Tumwine, a CMA market research officer, says. 

CMA noted that during the third quarter of 2023, the number of investors in unit trusts rose by 13.4 percent to 64,384, largely because of the unpredictable equities market. 

Unit trusts have been giving investors an annual return of about or above 10 percent, much of which is earned from government bonds and bills, which, according to CMA, makes up 70 percent of their investments, while the rest is invested in equities, real estate, fixed income, and corporate bonds.

Many investors, such as NSSF, have also indicated that they would exit some equity investments after losing billions of cash in the period ended December 2023. 

Trading activity has, therefore, reduced with the USE market capitalisation dropping from Shs21.7 trillion to Shs16.2 trillion by the 2023 third quarter, which means that the value of the stoke investors collectively, dipped. 

USE data indicates that five cross-listed counters - Centum Investments, East African Breweries, Jubilee Holdings, and Kenya Commercial Bank Group - have seen their market capitalization decline, accounting for the majority of the decline.

In addition, four locally listed counters including dfcu, MTN, National Insurance Company and the Uganda Clays dropped.

Cross-listed companies have long haunted the local market as foreign investors, primarily from Kenya, pull out of the Nairobi Securities Exchange in response to depreciation of the Kenyan shilling. 

Investors continue to look West to secure their investments in the best way possible. 

Many developed economies as they sought to tame inflation, increased interest in the bond market, thus causing a flight in many small markets such as Uganda. 

By the close of last year, the local share index, which had opened at 273, had fallen to 255 in April but rose again in December to close the year at 274.79, which represented a 0.81 percent increase. 

The recovery, Aiden Amumpaire, an equity trader at Crested Capital, says, “was due to Umeme that has been dominating turnover” and continued issuance of dividends. 

Interestingly, British American Tobacco Uganda declared the most dividends in 2023 of Shs209 per share, the most by any company on the local exchange, but it had a dormant counter.

“Batu is not trading because its share price is so high at Shs15,000. It traded once this [2023] year,” Amumpeire said. 

Changing business models

The evolving market space has forced companies and businesses to reinvent operational models as profits dip in a world where they can’t afford to take risks.

Companies in the banking and media space have been the most affected by technology. 

However, many of them have indicated that they are ready to adopt new business models to create new revenue streams and optimise returns from new technology. 

Media has suffered a lot of disruption due to growth in real-time news reporting via social networks. 

But in salvaging what is left, companies such as Nation Media Group, which is cross-listed in the USE, have had to innovate new selling points such as the introduction of a paywall on content that the company deems prime. 

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