UGANDA: Stock exchange takes $21.5M dive after foreign investor exit
THE EAST AFRICAN – Uganda Securities Exchange (USE) registered a huge slump in trading turnover and volumes during 2017, exposing pressure following the exit of many foreign institutional investors and a decline in corporate activity.
But industry players, pegging their optimism on falling interest rates as the Bank of Uganda maintains a low central bank rate, are upbeat that the exchange will recover this year.
Data released by Crested Capital Ltd shows that USE’s total market turnover fell from Ush173.77 billion ($47.5 million) recorded in 2016 to Ush96.17 billion ($26 million) in 2017, a difference of $21.5 million.
There were significant outflows witnessed on key counters such as Umeme Ltd and poor revenues, some lower than the Ush5 million ($1,366) posted in numerous trading sessions.
At least five foreign portfolio investors based in Europe exited the Umeme counter last year, due to fears about the impact of regulatory changes on its energy supply licence and bad loan provisions incurred against unrecovered investment costs that the regulator was expected to refund.
As a result, Umeme’s share price at the USE dropped by Ush60 ($0.016) to Ush430 ($0.118) during the first six months of 2017 — at the peak of the investor exits — and was down another Ush30 ($0.01) to trade at an average Ush400 ($0.11) through January unto the close of trading on February 7, 2018.
“Questions about the impact of changes in Umeme’s supply licence and outstanding payments due from the electricity regulator deeply affected investor appetite and depleted its share price,” said Simon Mwebaze, general manager at UAP-Old Mutual Financial Services Ltd, an asset management and stock brokerage.
“Falling interest rates earned on Treasury bills and bonds have prompted investors to explore attractive equity options in the stock market this year and this is likely to spur a strong recovery in trading during 2018,”he added.
We were unable to verify the amount of money due to Umeme from the Electricity Regulatory Authority, but the power distributor posted a half-year loss of Ush56.7 billion ($15.5 million) by close of June 2017, on the back of heavy default provisions by the firm.
Interest rates earned from Treasury bills averaged 8-9 per cent at the beginning of this month, compared with double-digit rates posted in early 2017 — a sign of falling returns generated by debt securities and a higher appetite for seemingly more attractive listed shares.
Total shares traded by the bourse declined from 1.27 billion registered in 2016 to 680.22 million shares in 2017, a trend partly fuelled by fewer shares traded on large counters such as Stanbic Bank Uganda’s estimated 51 billion listed shares and Bank of Baroda’s 10 billion.
In contrast, the USE All Share Index increased by 485 points to 1,962.39 points at the end of last year. This was a positive development attributed to gains posted by cross-listed counters such as KCB Group and Equity Bank Group.
A summarised breakdown of trading patterns shows Umeme Ltd accounted for the highest share of market turnover at 75 per cent but generated only 25 per cent of trading volume in 2017.
Stanbic Bank Uganda in comparison, accounted for 11.57 per cent of market turnover and 62.82 per cent of trading volume last year.
All the small counters, including NIC Holdings, collectively accounted for 0.69 per cent of market turnover and 5.72 per cent of trading volumes, the data indicated.
In particular, British American Tobacco Uganda experienced its poorest showing, without a single share traded throughout 2017.
This followed a diminished free float of less than four per cent recorded in 2016, declining profits and an apparent mismatch in offer and bid prices quoted on the counter.
Whereas stockbrokers reported a limited number of shares available for sale on the British American Tobacco Uganda counter in blocks of less than 200 shares offered at Ush25,000 ($6.8) per share compared to a stock price of Ush30,000 ($8.2), there was no demand at this counter last year, coupled with lower market valuations of Ush10,000 ($2.7) per share issued by analysts.
“Recent interest rate increases registered in US financial markets and strong gains posted by its equities segment in 2017 have led to substantial capital outflows among developing and emerging markets since mid-last year.
The Ugandan stock market apparently suffered more than the Kenyan one because of higher exposure to foreign institutional investors,” said Keith Kalyegira, chief executive officer of Uganda’s Capital Markets Authority.
“While Kenya’s stock market has a foreign-to-local ratio of 55:45 per cent in favour of foreign investors, Uganda’s comparative ratio stands at 70:30 per cent. The small number of corporate actions recorded last year affected overall market activity.”
“But declining interest rates are likely to steer stronger stock market activity this year,” Mr Kalyegira added.
Few corporate actions registered at the USE also contributed to depressed activity, with low volumes of new shares flowing into the market, leading to diminished investor interest towards taking up new equity positions, industry players argue.
Besides the DFCU Ltd Rights Issue that added 250.88 million new shares to the stock market, the Kenya Airways capital restructuring transaction that saw the troubled airline’s creditors acquire some shares in the company in an attempt to minimise its indebtedness, brought fewer new shares to the market.
“The scarcity of corporate actions experienced in the stock market last year significantly depressed market turnover and volumes.
“However, we are looking forward to better trading activity this year as big investors retreat from the debt market that has suffered from falling interest rates in recent months in an attempt to reap from more attractive equities,” said Joseph Kibuuka, equity financing manager at Crested Capital Ltd.