High interest rates on govt securities hit USE

Stockbrokers at the Uganda Securities Exchange trading floor. PHOTO | FILE 

By MARTIN LUTHER OKETCH

In Summary

• Umeme and Stanbic still dominated the market, accounting for over 90 per cent of the total volume traded during the period.

High interest rates charged on government securities and price valuation in some of the company shares have led to a decline in equity performance at Uganda Securities Exchange in the third quarter of 2015 compared with the same period last year.

Owing to a tight monetary policy by the Bank of Uganda that has been in place over the past five months, interest rates on government securities have shot up — for the 91-day Treasury Bill, the interest rate is 21.06 per cent, the two-year T-Bill is 20.59 per cent while that of five years is 20.31 per cent, the 10-year one is 19.53 per cent and the one of 15 years is 19.21 per cent.

Market players say that fund managers deem it safer to invest in fixed income segments where the rates are high, rather take a gamble in the equity markets where the share prices are static, said Edgar Mutebi, an analyst at UAP Financial Services.

“The second reason is the valuation of some company shares; for instance, the DFCU shares are at the moment overvalued while for the case of Stanbic Bank Uganda there is low demand for its shares, leading to a decline in price to Ush32 (0.96 US cents) per share from the Ush33 (0.99 US cents) it traded at for a long time,” he said.

Mr Mutebi added that the most active counter at USE was the Umeme one because of the dividends the power utility company has been paying, which has attracted a lot of interest from investors. However, due to the depreciation of the Uganda shilling, Umeme’s earning could drop.

Improved financial conditions in advanced economies have seen investors from the United Kingdom, the United States and South Africa actively investing in the Ugandan stockmarket. USE trade manager Andrew Mwima said turnover in the third quarter of 2015 was Ush36,661,675,560 ($11,167,100) from 179,472,021 shares traded.

In the third quarter of last year, USE’s turnover was Ush42,844,541,016 ($13,050,400) from 192,928,305 shares traded, translating with a decline of Ush6,182,865,456 ($1,883,300) in total turnover.

Umeme and Stanbic still dominated the market, accounting for over 90 per cent of the total volume traded during the period. DFCU contributed 7.89 per cent and Bank of Baroda 1.48 per cent and the rest of the counters less than one per cent.

On the performance of the USE index, Mr Mwima said the All-Share Index (ALSI) opened at 2000.2 this quarter and closed at 1924.02, an overall drop of 3.28 per cent. The local securities index (LSI) opened at 324.03 and closed at 354.7, an overall growth of 9.47 per cent.

“Both USE’s indices — ALSI’s -3.28 per cent and LSI’s 9.47 per cent — outperformed the Morgan Stanley Capital Index series that are used as benchmarks for markets in our segment,” he said. “The MSCI frontier market index, which tracks frontier markets in Europe, the Middle East, the Americas and Africa, returned -10.5 per cent.”

Apparently, the US-based MSCI, which is the provider of equity, fixed income and hedge fund stockmarket indices as well as equity portfolio analysis tools in frontier markets, registered -9.34 per cent.

Experts attribute this dismal showing mainly to the slowdown in the global equity demand as a result of the slump in China’s economy.

In its updated Global Financial Stability report released on October 7, the International Monetary Fund said financial stability had improved in advanced economies since the April edition.

This progress reflects a strengthening macro-financial environment in these economies, implying that as the recovery has broadened, confidence in monetary policies has firmed, and deflation risks have abated somewhat in the euro area.