Trading On the Uganda Securities Exchange Pro & Cons

Uganda Securities Exchange USE is a “bull market”

The Uganda Securities Exchange has only been in existence since June 1997 and so is considered an emerging market especially compared to say the New York Stock Exchange (1792) or the London Stock Exchange (1801).

Our recent founding can be good. Emerging markets’ stock exchanges are typically “bull markets” (one where prices are rising or expected to rise). The statistics for the growth of USE’s all share Index (ALSI); a measure of all the companies listed on the exchange shows that the ALSI has been rising except in 2008; the peak of the global credit crisis.

So is it worth investing in stocks and bonds via USE?

The cons

Low trading volumes

USE trading volumes are pretty low and some shares on the basis of the trading statistics often have no activity for days. There are 14 equities traded on the USE (April 2012), but of these, three (Stanbic Bank, Uganda Clays and Bank of Baroda) contributed 70% of all trading in the last year.
Therefore, to trade, especially for profit purposes, the focus should probably be shares with high trading volumes as these will be most representative of an active market i.e you can buy/sell without delays.

Foreign exchange losses

This is key, especially if you borrow/invest in foreign currency. The shilling has over the last five years been consistently “losing value” against the pound an ddollar.

Broker commissions

Many stock brokers in advanced markets have moved from percentage-based commissions to fixed ones but the USE is a percentage-based structure. USE brokers charge 2.1% on the first sh200m of each trade hence sh4,000,000 or $ 1,589 for a sh200m trade compared to say leading broker Charles Swabb who charges a fixed $34 (about sh83,000) for a broker assisted trade.

Broker commissions based on percentage are therefore a disadvantage where the amount per trade is large but where it’s small, they may be a good thing.

The pros

Good returns
In light of the cons, the clear advantage therefore for the investor who has access to other stock exchanges but who wants to invest in the USE is holding stocks for the short term say a year before selling them. In a bull market like USE, it is expected that share prices will rise.

No capital gains tax

There is no capital gains tax chargeable on USE trades. Capital gains are the profit made when you sell shares/bonds at a higher price than you bought them. Unlike many developed economies, the investor enjoys tax free profit.

To get it right:

Act through a broker. As most people are not experts in this sector, it is advisable that you have an investment broker who can implement your buy and sell strategy. Capital Markets Authority (CMA) the regulator for USE has a list of brokers, fund managers and investment advisors.

Research. If you choose not to use a broker, then research extensively on information such as prices and qualitative information on your target. The financial statements and press reports/stories give you an indicator of the nature of the entity. There is a catch; past performance does not equal to future performance.

Final word
There is a lot of merit in investing in the USE considering that despite the cons, there can be returns in about one and a half years, which is often better than say in fixed savings in developed economies or their stock markets.

Dickson E Wasake
The New vision Newspaper
24-April-2012