Gold is soaring high as new bonds in the US become less appealing, turning bullion into prime investment. PHOTO/FILE
There is a hefty flood of cash eyeing lucrative financial markets from foreign investors that could possibly rally Uganda’s Treasuries and the stock market, but a fear reigns that recently released economic data from the Finance ministry isn’t convincing enough.
The United States Federal Reserve (Fed) has made clear its intention to reduce rates in September, something that will make its bond market less attractive for the impatient bullish investors who are now looking for lucrative alternatives around the globe. This follows a protracted battle the Fed has had with inflation even though the US market was expecting the country’s ugly unemployment data to allow its central bank to resist with a view that hard times are still lingering. This, the Fed said, is not threatening and can cool anytime.
Uganda is now one of those economies where the dollar is expected to be wired, which can help boost its economic growth and currency stability.
“But this foreign direct investment’s magnitude is unclear since even Uganda reduced its central bank rate at the time when inflation was picking up. The foreign portfolio investors will have to look at Uganda’s current inflation to calculate the opportunity cost involved,” Mr Denis Kizito, the Director of Market Supervision at Capital Markets Authority (CMA), told Business Outlook.
In July 2024, Uganda’s central bank kept its rate at 10.25 percent. But in early August, Bank of Uganda (BoU) gave it a slight trim, bringing its lending rate down to 10.0 percent. This brings Uganda’s rate below Kenya’s, which recently dropped to 12.75 percent—the first cut in four years from 13 percent—but still higher than Tanzania’s steady six percent.
Touch and go
Uganda’s Finance ministry recently released its state of the economy report and it showed that inflation for the year ending July 2024 rose to 4.0 percent, up from 3.9 percent in June. This was attributed to higher prices for everyday goods and food items. New data shows that August Inflation (a year-on-year) went down 3.5 percent, still below the 5.0 percent target of the Bank of Uganda.
Investors typically seek higher returns to offset perceived risks. They often target high-yielding securities with attractive interest rates, but these also come with higher economic risks, like inflation or instability, which central banks work hard to manage.
“If there is a rate cut in [the Fed rate] September, we will probably see increased demand for US equities as investors shift from fixed-income assets to equities. On the other hand, this will likely lead to higher demand for high-yield bonds in emerging markets as investors seek to maximise their returns,” Cindy Hannah Kukunda, a portfolio manager with asset management firm ICEA LION, told Business Outlook.
Uganda currently has three dollar funds directly tied to the US Fed rate, including UAP Old Mutual and Britam. These funds typically invest in Eurobonds, where returns are a mix of the coupon rate and the London Interbank Offered Rate (Libor), set by the London Stock Exchange.
Libor is basically the interest rate that major banks in London use when they lend money to each other. It’s often used as a benchmark for setting interest rates on various loans and financial products.
“The determination of the Libor puts into effect the consideration of the Fed rate which is then factored into the exchange rate. So any change in the Fed rate will have an effect on investors who have their money in Eurobonds,” says Mr Kizito.
Old Mutual’s dollar fund has assets worth $26.4 million (Shs97.4 billion) as of August 2024. The fund “predominantly invests in a diversified portfolio of short-term, high-quality, US dollar-denominated debt securities, Treasury securities and bank certificates of deposit to ensure safety, liquidity, and competitive returns.”
After Jerome Powell, the Chair of the Federal Reserve of the United States’ Jackson Hole speech on expected rate cuts last week, the US 10-year real yields have dipped to their lowest since December. It’s during the same time that signals that money is moving are manifesting. Gold prices are up and Bitcoin is rallying once more.
The precious metal
Gold is soaring above $2,500 (Shs9.2 million), as new bonds in the US become less appealing, turning bullion into a prime investment. This year, the precious metal has shined as one of the top performers among major commodities, especially in the first half, when central banks—including Uganda’s—rushed to buy it to hedge against any downside from the US dollar, the usual reserve currency.
Spot gold has jumped over 20 percent so far in 2024, with Goldman Sachs, an investment bank, predicting back in April that it could hit $2,700 (Shs9.96 billion) an ounce, something that most hedge funds and speculators have not discounted.
Demand for gold-backed ETFs is also making a comeback. Holdings in the Standard & Poor’s Depositary Receipts Gold Shares, a major player in the sector, have increased for eight consecutive weeks—the longest streak of inflows since mid-2020.
Cryptocurrency
Bitcoin reached $65,000 (Shs239.9 million) for the first time in about three weeks, thanks to a surge in demand for US ETFs and speculation that the Federal Reserve might ease its monetary policy. It briefly touched $65,030 (Shs239.9 million) on Monday before settling back at $63,780 (Shs235.4 million).
On the flip side, Toncoin, tied to the Telegram blockchain, faced setbacks after Telegram’s co-founder Pavel Durov was detained and later charged in France, which likely dampened its potential gains.
Uganda’s exposure
On a brighter note, Uganda’s stock market has been a source of optimism for investors. Airtel Uganda recently paid a dividend of Shs2.15 per share, along with Umeme and Stanbic Bank Uganda. While share prices for these companies have dipped over time, they have consistently delivered dividends.
“For the past five years, the stock market has been one that is dividend driven. I, as a buyer, wouldn’t want to buy expensive if there is a room for me to buy a particular stock cheaply,” David Bateme, the head of research at Crested Capital, told Business Outlook this past workweek.
But Mr Bateme advises that investors shouldn’t rush to sell off their shares. Instead, they should understand why share prices have dropped. Prices are influenced by supply and demand as well as the financial health of individual companies.
Mr Kizito advises that investors eying Uganda’s financial markets need to carefully weigh their options. While there are many positives, there are also red flags that cannot be overlooked.
New economic data from the Finance ministry already indicates that purchasing power is under threat due to rising commodity prices. This comes as a surprise, especially since the central bank had recently lowered its rate just before this data was released.
“Investors, who are expected to show appetite in Uganda’s securities—be it stocks on the stock market or bonds, are expected to do a number of cost benefit analyses and see the merits and demerits of the reduction in the central bank rate here and the reduction in the Fed rate in the US,” Mr Kizito said.
Headwinds
The inflation in Uganda is picking up and this is what usually compels any prospective investor to determine the magnitude of who gives what in terms of financial returns.
“In hyper-inflation economies like Uganda’s, when the central bank rate goes down, it’s a red flag for many watchers. The central bank comes up with policies that wipe away excess liquidity from the economy. This doesn’t need to be immediate. There has to be thorough market surveillance to match what’s happening in the economy,” Mr Kizito added.
According to the CMA official, this inflation is just the beginning. He anticipates inflationary pressures will escalate as Uganda approaches the 2026 elections, with many legislators and candidates expected to inject significant funds into the economy to gain support. This increase in liquidity will likely prompt the central bank to raise its rate and issue more government bonds to manage the excess money.
