Financial theory teaches us that over time, share markets should deliver better returns to the investor than bank deposits and government paper. This is due to the fact that investment in shares entails more risk than investment in bonds and fixed deposits which offer fixed rates of return and are perceived to be less risky. Investments in risky investments have to offer higher returns to the investors as compensation for the extra risk they take on. Empirical evidence supports this and this article highlights how the Ugandan share market has out-performed investments in the government bond market and commercial bank fixed deposits over the three year period from October 2013 to October2016.
Share markets tend to experience considerable volatility from time to time. However, for investors prepared to wait it out during testing times, as evidenced by the recent bear market at the Uganda Securities Exchange (USE), we can expect share market investment to deliver considerably better long-run returns than supposedly‘safer’ investments such as term deposits.
Analysis of share performance at the USE over the last three years
Let us assume an investor decided to spread UGX 10 million over the eight locally listed counters on 31stOctober 2013 and deployed a ‘buy-and-hold’ strategy till 31st October2016. A few assumptions are made here:
The investment is evenly spread across all the eight counters; i.e. UGX 1.25 million per counter;
Analysis will not include transaction costs and taxation;
All dividends earned are re-invested to purchase more of the listed firm’s stock; which is assumed to be readily available on the market.
All dividends (both final and interim) are assumed to have been paid at the end of each calendar year and reinvested immediately.
Government bonds of one year maturity were readily available for reinvestment of all the previous year’s bond proceeds.
Bond rates were taken to be those prevailing at the rate offered in the nearest primary auction.
Fixed deposit investments and Treasury bond investments are tax-free.
Fixed deposits rates were based on the one year term deposits, rather than the more popular shorter-term deposits, which provide even lower returns
The table below indicates the expected value of the investor’s portfolio as at 31st October2016.
Initial investment of UGX 10 million
Total sum at end of investment period
Investment equally split amongst all locally listed shares at USE
Investment in one-year government bond rolled over throughout the three years
Investment held in bank fixed deposit for the three year period
Source:USE data, BoU
The results indicate that an investment tracking the USE local counter index would earn an annualized return of 28%, way more than the return on an investment of the same amount in one year bonds (17%). An investment in commercial bank fixed deposits over the same period of time would only earn an annualized return of 13%.
During the period under review, government bond yields were at their peak and reached 23.86% in the last auction of October 2015 – when the last hypothetical bond was purchased.However, despite the bear market at the USE over the last two years, a well-diversified portfolio of stocks would have still outperformed the government bond yields.
A closer look at the individual counters as per the table below shows that BATU was the best performer with an annualized return of 105%. Positive returns were also realized on four of the other local counters. These were BOBU (13%), DFCU (17%),NVPL (2%) and UMEME (20%). Three counters posted negative returns over the period under consideration and these were NIC (-3%), Stanbic (-2%), and Uganda Clays (-26%).
Total dividends earned during the period of investment were close to UGX 3.6 million while capital gains were UGX 7.2 million, which combines to a total return of close to UGX10.8 million from the entire investment.
Performance of individual stocks at the USE from October 2013 to October 2016
Initial Investment (UGX) at 31/10/2013
No. of shares bought
Current number of shares as at 31/10/2016
Capital gains earned (UGX)
Dividends earned (UGX)
Value of shares at 31/10/2016
Annualized return (%)
Source: Author’s computations using data sourced from the USE
As per the above table, the BATU counter has had the highest share price rise from UGX 4,050 in October 2013 to UGX 30,000 in October 2016. This would have earned an investor capital gains of UGX 9,029,837. Capital gains were also prevalent on the BOBU and UMEME counters. Despite a fall in the share price of DFCU from UGX 1,202 to UGX 789 over the investment period, an investor would still earn an annualized return of 17% due to the dividend payments and bonus issue from that particular stock.
The following counters also issued bonus issues during the investment period: BOBU had a 1 for 5 bonus issue in 2013; DFCU had a 1 for 1 bonus issue in 2014,while NIC had an 11 for 8 bonus issue in 2014. These greatly increased on the dividend returns accruing to the investor given that all dividends earned were assumed to have been reinvested. In the above computation, bonus shares were considered to constitute dividend income to the investor.
The writer is a Research and Market Development Officer at the Capital Markets Authority (CMA). The findings, interpretations, and conclusions expressed in this article are entirely those of the author and do not necessarily represent the views of the CMA.