East African Business Week (Kampala)
29 November 2008
Kampala — "If you are a stock exchange dealer, this is the time to make a fortune when there is a mad rush of selling shares fearing the global financial crisis," Musa Nsubuga a Sales and Trading Analyst with MBEA Brokerage Services Ltd advises.
The question, of course, is how many will heed to his advice? Definitely very few if they don't read further than this paragraph.
It is true most counters at the Uganda Securities Exchange (USE) are registering a fall. It is also true the global financial crisis is biting harder here in Uganda and the most prudent thing is to keep close to your money as much as possible.
"We are aware that many shares are being put on the market because many investors are wary of the stock instability and are taking away their money into construction business or investing in Treasury bills hoping to come back when the dust settles. But this is a mistake," warns Nsubuga.
"The fall of prices on the stock exchange here in Uganda is not because companies are doing badly financially as it is in America where a simple firing of an executive officer in a given company causes a fall on the company's counter. All our listed companies are doing fine financially," Nsubuga counsels.
This is the time for 'bottom fishing' which in Luganda language translates as 'kukkokota'. This means a serious stock exchange investor buys at a time like this when most counters are registering a fall. This fall, according to stock brokers, is caused by panic selling. There is a lot of supply and yet demand for the shares is low. This pushes the stock exchange market to register a downfall.
"Many take out their money to investments they deem safer like bonds and the construction industry which, has become en-vogue; however, for a serious stock exchange investor, this is the time to buy when the prices are going down. Why? Because, I can assure you, the market is going to stabilize," Nsunbuga explains.
It can also be said that the decline has been caused by other factors other than the global financial crunch. For example Uganda Clays Ltd share cost had hit a high of UShs22, 580 (US$11.5) because there was scarcity of shares yet initially at the time of listing in the year 2000, the Initial Public Offer (IPO) was at UShs4,000 (US$2) from 5,000 ordinary shares.
To create supply, there was a share split in the year 2006 at a ratio of 1:10. This improved on the liquidity or availability of shares and pushed the price down to UShs2,225. This split led to a new total of listed shares to 5,000,000. This too, was over subscribed and pushed the price to a new high of UShs6,000.
Early this year, the company had a Rights Issue. This is an internal split of existing shares and the priority is given to the existing shareholders at a discount. This created more 4,000,000 shares and the total shot to 9,000,000.
As you read this, Uganda Clays has just had another split at the ratio of 1:100. This has pushed down the price to the current average of UShs145 (US$0.1).
Hence Nsubuga argues the decline at the UCL bourse is not caused by the global financial crisis but by the creation of more shares through the Rights Issue and splitting.
Therefore, for investors who panicked that their millions were to be wiped out in a day need not panic because the present levels are not worrying.
Moreover, since there is more supply than demand because of panic selling following from the financial squeeze caused by other factors other than listed companies doing badly, this is the time to buy.
In a few months when the dust settles, the price will rise, creating scarcity and you can trade off and reap in double digits of your initial investment. WOW!!
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Mr. Nsubuga was corect about buying when markets are low. Warren Buffett, the famed Oracle of Omaha, never seazes to repeat that, i stock markets, you should be greedy when others are fearful and fearful when others are greedy. That said, the psychology of the herd mentality is so hard-wired into human beings that it remains most difficult to be sane when everybody around you has lost their mind.