Listed companies take hit from Covid-19

Stock brokers during a trading session. Fixed income markets are likely to remain the investment of choice for some time to come according to experts. Courtesy photo  

By Martin Luther Oketch

Uganda Securities Exchange (USE) is where publicly listed companies list a portion of their shares
for the general public to invest their money by buying shares.

Equities are stocks or shares in a company. If you buy stocks, you’re buying equities. You may also get “equity” when you join a new company as an employee.

That means you are a partial owner or can be, of shares in your company. Since equities do not pay a fixed interest rate, they do not offer guaranteed income. In other words, with equities come with risk.

Uganda Securities Exchange has four quarters of trading activities on the stock exchange each financial year.
During the first quarter of 2020 (January to March 2020), research analyst at Created Capital, Mr Oscar Paul Emasu says trading turnover on the USE in Q1 2020 stood at Shs21.51 billion with a volume of 273.58 million shares.

“The market improved significantly versus Q1 2019, comparable turnover is up 143 per cent from Shs8.84 billion in Q1 2019 to Shs21.51 billion in Q1 2020,” he said.

Explaining what contributed to USE’s better performance in first quarter compared to last year, Mr Oscar says: “The trend of the improved performance in Q1 2020 started in the last quarter of 2019 where the Electricity Regulatory Authority (ERA) approved favourable performance parameters for Umeme, there was also significant liquidity on the Stanbic counter which also drove activity.”

Mr Emasu adds: “Indications of strong FY2019 financial results for several listed companies including British American Tobacco, Bank of Baroda, dfcu limited, Stanbic Uganda and Umeme boosted optimism in the period as investors positioned for attractive valuations.”

During the quarter, all sorts of investors were in the stock market comprising of retail individuals, local funds, African funds and international funds.

Mr Emasu says in quarter one, Umeme was the most preferred in the period, trading 64.07 per cent of turnover, Stanbic Uganda Holdings with 24.31 per cent and dfcu with 11.19 per cent.

The stock market was hit by Covid-19 towards the end of quarter one as most activities internally and externally affected corporate actions.

Following the outbreak of Covid-19, businesses and the general public have been encouraged to adopt a number of social distancing measures which restrict public gatherings.

Consequently, the Uganda Securities Exchange also advised listed companies to defer all business ordinarily conducted at Annual General Meetings including dividend approval until such a time that is appropriate.
Mr Emasu says in terms of dividend payment, some companies especially those in insurance and banks may have to get regulatory approval before they pay dividends this year.

“Ugandan companies have not suffered the price declines such as companies in other East African markets. Research tells us there are good opportunities to acquire value at the USE. However, investors should consider a company’s post-lockdown earnings when making investment decisions. Bonds and treasury bills, on the other hand, have seen a brisk trade during the lockdown as investors flock to the certainty available from fixed-income investments,” he says.
Despite the current Covid-19 challenges, stock markets worldwide have continued functioning.
The chief executive of Crested Capital, Mr Robert H. Baldwin says: “Uganda’s stock market (USE) has remained open during the lockdown despite a paucity of support.”

The big players in the stock market are usually the institutional investors comprising of both local and foreign. In Uganda, the National Social Security Fund (NSSF) is the biggest domestic institutional investor, actively investing in bonds and shares among others.

However, the managing director of NSSF, Mr Richard Byarugaba told Prosper Magazine that they did not invest in shares at USE during quarter one.

“We didn’t invest in equities at USE in the quarter one of this year because there are few instruments are available and the turnover is very low. However, we invested in other markets in the East African region,” he said.

Collective assets
The chief executive officer of Capital Markets Authority, Mr Keith Kalyegira said in an interview with Prosper Magazine last week that collective investment scheme assets grew from Shs270 billion at the beginning of January 2020 to Shs317 billion at the end of March 2020, a 17 per cent increase mostly invested in umbrella and money market funds.
“This was slower than the growth experienced over the past 12 months which registered a 103 per cent growth in assets from Shs156 billion to Shs317 billion. The outlook for growth in collective investment scheme assets remains positive,” he said.

Mr Kalyegira says turnover on the USE dropped by 15 per cent to Shs23 billion from Shs27 billion between January and April 2020 compared to a similar period last year.

“This was largely due to muted participation from domestic and off-shore investors due to uncertainty generated by the pandemic, despite improved financial performance reported by most active counters - Umeme, Stanbic and dfcu which accounted for 98 per cent of the turnover during this period. The local counter index (LCI) lost 2.5 per cent during this period,” he said.

However, there has been a reduction in equity value at the stock exchange.
“General liquidity reduced significantly; basically the turnover of activities on the exchange has reduced. When I compare from April 2019 to April 2020, there has been a remarkable reduction in the value in some counters.”
Adding: “This reduction is driven by the fact that the foreign investors were exiting the market taking their money back to the USA as the interest increased and generally, in times of uncertainties there is usually a flight to the US dollar as a store of value.”

Why invest in equities?
World over, people invest in equities because of their potential for high returns. In your investing portfolio, your “equity exposure” is another way of describing your exposure to the risk that you will lose money when the value of the stocks you own declines.

The equity performance in any stock market is often disrupted by prevailing economic conditions. During this time, investors tend to shift their investments in the safe assets like government securities hence affecting the equity prices on the stock exchange.

Bonds and stocks
To understand how stock and bond prices can affect each other, it is essential to understand that stocks and bonds are competing for investor’s money. Stocks are considered riskier than bonds since they can lose value rapidly depending on a company’s fortune and the stock market is typically much more volatile than the bond market.

Bonds, on the other hand, are controlled by their face value; the value of the loan that bond was initially issued for. When a bond eventually reaches maturity, the bond issuer will pay the bondholder at the face value of the bond, regardless of economic conditions at the time of maturity.

Explaining the decline in equity values, Mr Kalyegira said this confirms the fact that there are volatilities in equities because the prices can either rise or fall. This is because equities are more prone to external noise or factors, making them more volatile than the fixed incomes.

“Overall, equities tend to perform better than the fixed incomes. So many times during times of uncertainties, investors end up going into the bond market,” he said.

Nearly all stocks have lost value at USE beginning from the first quarter up to date because of the uncertainties in the economies /financial markets.

Mr Kalyegira says: “If you look at the Umeme counter is now trading at IPO price essentially; so that shows part of the market’s uncertainties and yet there is nothing that has reduced the value of businesses. It is just about investor sentiments.”

He said the investor has been affected by the external conditions, the investor’s sentiments about this whole pandemic of Covid-19 and people were not so sure about the fortune of certain businesses.
“Hopefully this is temporary. We hope that as the world reopens up for business, things will turn back to normal,” he says.

Giving some insights on the collective investment scheme, Mr Kalyegira says: “The outlook for growth in collective investment schemes remain positive as we expect more domestic investors to seek safety in umbrellas and money market funds during these uncertain times.”

The managing director of Alpha Capital, Mr Stephen Kaboyo says the uptake in the government securities since the beginning of the year has been high as measured by the bid to cover ratios in the auctions.

Government has been borrowing heavily from the domestic banking system and by extension the offers have been large.
Mr Kaboyo says market players expect that yields will edge up in the second half of the FY 19/20 because of the government’s need to borrow and plug the gap of the revenue shortfalls. However, yields have remained relatively flat on account of excessive liquidity conditions in the market.

“In the first quarter, there was the adequate presence of offshore portfolio investors. However, their appetite waned and there was a flight to safety as market stress set in and the shilling weakened,” he said.

Mr Kaboyo further states: “Traditionally, government securities are beneficiaries of bad times compared to other asset classes. As we stare at a possible recession, with economic output shrinking, growth sharply lower, this will hurt corporate earnings and by extension stock prices. In my view, fixed income markets are likely to remain the investment of choice for some time to come.”

The IMF said in Global Financial Stability report, financial conditions in advanced as well as emerging economies are tighter than at the October 2019 World Economic Outlook.