Declining share prices on the East African stockmarkets have made small and retail investors hesitant to buy company stocks and opened a debate on the importance of speculators for growth.
A new markets report by the East Africa Venture Capital Association and I&M Burbidge Capital shows that despite the bear run that has hit the region, the equities markets posted positive returns over the 10-year period between 2009 and 2018, proving to be attractive to long-term investors.
The report released last week shows the Ugandan Securities Exchange as the best performing bourse during the period, realising an annualised price return of eight per cent, followed by the Nairobi Securities Exchange with seven per cent, then the Dar es Salaam Stock Exchange with five per cent and the Rwandan Stock Exchange with a return of negative one.
“The positive price returns from 2009 to 2018 across Uganda, Kenya and Tanzania indicate that the equity markets in the region remain attractive for investors who choose to take a long-term view with their investments,” says the report. “This is supported by the fact that over the long term, share prices tend to reflect the underlying reality of companies and the returns they deliver to shareholders.”
But questions are emerging as to whether “buy and hold” or long-term investors alone are capable of revamping activity on the regional stockmarkets.
While the report notes that region is ripe for long-term investments, other analysts are of the view that stockmarkets cannot operate efficiently without active traders or speculators (small and retail investors) who are deemed critical in providing liquidity to the market and improving the quality of pricing.
“Stable capital markets need all groupings of investors irrespective of their anticipated outcome. Speculators, for instance, provide liquidity to the markets and improve the quality of pricing,” said Gatuyu Justice, a tax senior at RSM (Eastern Africa) Consulting.
Small and retail investors on regional stockmarkets have been kept away by trading malpractices by some market intermediaries, high transaction costs, volatility of the equities market and poor returns relative to other alternative investment options such as bonds and real estate.
A survey by global financial and investment advisor RisCura last year shows that East Africa runs some of the most expensive stockmarkets in Africa due to high brokerage fees, clearing and settlement fees, and other charges.
It is estimated that the cost of trading shares on African exchanges is considerably higher than in developed markets, with a significant portion of trading costs being made up of brokerage commissions.
According to the East Africa Venture Capital Association, the major challenge facing East African stockmarkets is low liquidity levels, with the bourses dominated by a few blue-chip companies. In Kenya, for instance, this is partly blamed on stringent listing requirements that have discouraged potential issues from the bourse, and high listing costs.
According to the report, East African equity markets provided a good opportunity for short- term investors between 2012 and 2014.
The NSE recorded a 44 per cent price return in 2013, largely on account of strong foreign investor participation while the DSE posted a return of 35 per cent in 2014.
The USE recorded a return of 39 per cent in 2012.