ASIGMA Capital Market Report: FY 2018 & Q1 2019

Equities

Among advanced economies, tariff actions and higher energy prices dampened growth. Brexit uncertainty affected the UK and the EU in 2018 and continued into Q1 2019. Set against these developments, US equities maintained robust growth, with private sector activity supported by sizable fiscal stimulus. However, due to the temporary nature of some of its provisions, the US tax policy package is projected to lower growth for a few years from 2022 onwards as prior tax credits granted expire.

In 2018, frontier and emerging markets slumped as they struggled to compete with the rise in US treasury yields. The emerging market indices shown below illustrate this downturn. The frontier and emerging market downturn has since subsided in Q1 2019 as the Fed lowered its forecast for US economic growth and asserted in March that rates would remain at current levels at least until the end of the year, compared to December’s projection of two rate hikes.
Among frontier markets including East Africa, the influences of rising oil prices increased inflationary pressure while higher US yields resulted in capital inflow reductions, higher financing costs, and exchange rate pressures.

In Uganda, CiplaQCIL’s listing ended a six-year IPO drought on the Uganda Securities Exchange (USE), raising the number of locally listed companies to nine. UMEME stock price suffered the biggest hit due to the electricity distributor’s prolonged legal battles with the Electricity Regulatory Authority that have impaired earnings.

Regional Equity Performance

South Africa and Nigeria

The Johannesburg Stock Exchange Top 40 Index and the Nigeria All Share Index contracted in 2018 following significant selloffs by foreign investors seeking rising yield in fixed income markets in advanced economies. Johannesburg’s FTSE/JSE All Share Index ended the year down 11 percent, its worst performance since 2008.

Most regional markets registered negative returns with Nigeria being the worst performing market in 2018.  In Q1 2019, most african markets have clawed back some of their losses, notably Kenya, Egypt and Zambia.

Uganda Equity Performance

Dividend Performance

In addition to global macro-developments that affect capital flows, the Ugandan equity market is to a large extent driven by dividend-oriented strategies i.e. investment in companies for their dividend yield or their history of dividend growth. Therefore, companies with significant dividend payout and/or high free-floating market capitalization often move the market and spur market activity. These companies include UMEME, Stanbic Uganda (SBU), DFCU and British American Tobacco Uganda (BATU).

Following the election tension in 2016 that led to a spike in the USDUGX rate, local companies experienced a downturn in earnings, and consequently dividends, illustrated by the USE Local Company Dividend Index below, leading to a decline in the USE Local Company Index.
A modest rise in the Local Company Dividend Index is projected in 2019 given favorable interim and year-end earnings announcements by large contributors to the index, UMEME, DFCU and SBU.

2018 USE Price Gainers and Losers

Fixed Income

Regional Fixed Income Performance

As a result of Fed hikes, US yields rose pushing investors to divest holdings in emerging market bonds. For example, Kenyan Eurobond prices fell throughout the year as a result of these selloffs. Therefore, the yields on these Eurobonds rose as shown below.

This selloff in the African Eurobonds market caused bond prices  to fall, illustrated in the figure below. African Eurobonds have since recovered in Q1 2019 since the Fed lowered its forecast for US economic growth and kept its policy steady following its March meeting. This has led to increased investor demand for high yield emerging and frontier market bonds.

Uganda Fixed Income Performance

Short-term yields rose sharply between June and July following an increase in the domestic borrowing requirement by government, which necessitated increasing the auction issuance amounts. Yields rose once again in October as the Central Bank raised its policy rate in response to inflationary pressures due to increasing oil prices.

The Central Bank has maintained its policy rate at 10% as inflationary pressures remain subdued in Q1 2019. Yields have fallen in Q1 2019 as short-term government borrowing has tapered off.

Currencies

Globally, the monetary theme for 2018 was clear from the start of the year – the extreme monetary accommodation provided by central banks in the wake of the 2008 financial crisis and the subsequent aftershocks would continue to be removed.

Higher US bond yields and Fed rate increases drove demand for the USD in 2018 at the expense of major currencies like the EUR and the CNY. Increasing divisions within the EU, especially between creditor and debtor countries, have evidently dampened economic prospects resulting in increased demand for EUR put options.

Global Currencies

US Dollar (USD)

The USD gained significant traction in 2018 against a basket of foreign currencies including the EUR and the JPY amidst trade tensions with the EU and China. These gains are illustrated in the USD Index below. The Fed hikes mentioned in preceding analyses increased the demand for USD-denominated fixed-income securities, strengthening the USD.

Regional Currency Performance

Currencies in Sub-Saharan Africa were under pressure throughout much of 2018 on the back of a stronger USD. However, currencies such as the UGX, KES and NGN  remained relatively stable against the USD, on account of steady macroeconomic growth and prudent monetary policy.
Most regional currencies contained depreciation against the USD to under 10% in 2018 with the KES and the EGP the most resilient.

UGX Performance Vs Kenya Shilling

The long-term performance of the UGX against regional currencies such as the KES is linked to the trade competitiveness between Uganda and its regional trade partners. In the second half of 2017, prolonged political uncertainty dented economic activity in Kenya and paved the way for Uganda’s trade surplus with Kenya during that period.

Despite sustaining a trade surplus  from mid-2017 up to the first quarter of 2018, Uganda has amassed a significant cumulative trade deficit with Kenya over the years, consequently leading to KES strengthening against UGX.Exchange rate pressures on the UGX mounted in the first half of 2018, largely on account of elevated USD demand from foreign investors and heightened speculative activity in anticipation of further depreciation.

UGX depreciation against the USD experienced during the first half of 2018 constrained the Central Bank’s efforts to conduct US Dollar purchases for reserve build-up. Only USD 49.6 million was purchased in the period January – June 2018, compared to USD 390.1 million purchased in the corresponding period of 2017. The Central Bank of Uganda leveraged its reserves of over USD 3 Billion to curb volatility in the Interbank Foreign Exchange Market (IFEM) on account of rising USD demand.
As Dollar pressures eased and economic activity stabilized in the second half of the year, the Central Bank focused on reserve build up. As at December 2018, the net Central Bank action in the IFEM amounted to a net foreign exchange purchase of USD 275 Million.