On the Diversification of Financial Resources

For one thing, liquidity on the bonds segment of the market, 2021 was a historical year for the exchange (note, liquidity is one of the key parameters that measures stock exchange’s performance). In 2022, the total trading activities reached Shs. 2.72 trillion, a historic high – albeit contributed largely by transactions emanating from the fixed income Government treasuries segment of the market. On the other hand, the exchange had a tough and challenging year in the equity’s liquidity

The perspective: liquidity determines interest and appetite to use the market for capital and fund raising, it determines volatility and price movements, it determines market depth, encourages investors participation in the market, it determines growth and potential for diversification of financial assets and resources. They say liquidity determines liquidity.

The context: projections from various sources indicates that 2022 will still be another challenging year, economies are expected to grow at a slower pace – which might affect markets performances. Is there a possibility to predict bullishness for 2022? The response to such a question would be, it is mixed – i.e., yes and no. Yes – to the extent that there is an appreciation that sources to finance sustainable development needs to have a combination of traditional and new alternative initiatives and there are efforts by all key stakeholders to move towards that kind of direction. No, in the sense that unless there is a different way of responding to questions such as: how can we efficiently and diligently finance our long-term development projects and enterprises from a good balance of local and external financial resources? how can we grow the capacity of our domestic markets so they can be more vibrant as channels of finance intermediation for long-term projects and enterprises investments?

A combination of the ongoing efforts by our government to address the fiscus which has resulted into the continuously increase in tax revenue, this is something significantly positive. Not in rhetoric, but in practical terms this increases the possibility of seeing the potential of increasingly financing our growth and development using local money. However, as is, for sustainable inclusive growth, the fiscal aspect needs to be combined with similar measures on the monetary side to potentially unlock local financial resources for better and efficiency use for financing development projects and enterprises – to which the central bank has been at the front, and positive results are progressively being seen.

Currently, we have about Shs. 35 trillion of savings within our banking system, however, it is also known that financial resources outside the system could be relatively larger than — the question is, how can these untapped sources be unlocked and intermediated for productive investments? A vibrant bonds market could be one of the tools to unlock this potential, and there has been good progress on this in these past three years, except for, the lack of micro-savings bonds targeting retail investors, issuance of municipal bonds and just a handful corporate bonds. Furthermore, in relative terms, especially if we compare with similar economies – despite the progress we are seeing on the treasuries, we are still on the lower end. As an example, in 2021 Kenyan fixed income (treasury bonds) transactions were worth equivalent to Shs. 20 trillion compared to our Shs. 2.5 trillion, they had new issuances equivalent to our Shs. 15 trillion, while our new issuance was only about Shs. 4 trillion – and so it applies to other similar parameters for measuring this kind of performance, whether ratios relative to the GDP, or transactions versus outstanding listing, etc.

The other challenge, or rather an opportune is that while treasuries attract funds at the yields we are observing, depends on maturity, it is tough to motivate the growth of a vibrant bonds market in the private sector. It is practically challenging for corporate entities to mobilize long-term investment financing via issuance of term notes or corporate bonds.

If we can imagine a situation where interest rates will be commercially and economically viable — two things might happen: (i) there will be increased business enterprises activities, as funding for them could be affordably accessed from the local market; and (ii) entities will have an option to either borrow from commercial banks or borrow directly from the public via issuance of commercial papers (i.e., corporates term notes and corporate bonds). The action of corporates accessing public money by issuance of notes and bonds will: (i) enhance pricing competition among lenders; and (ii) will further unlock idle savings which are not yet tapped into the banking system — these will be used for productive investment activities within the economy.

In a normal market environment, whenever certain asset classes, such as equity (shares) slows down, investors normally switch to other asset classes, such as treasuries or other fixed income instruments or gold, etc – like what we have been observing since the start of COVID-19 pandemic there has been a surge in the fixed income and a drop in the equities. And this is what is being observed across markets, Investors selling-off on the equity, switching their investments into treasuries and gold. One might argue, this presents an opportune for a diverse vibrant bonds market, given the increased appetite — and therefore private sector entities and local government authorities should seriously consider this as an opportunity to strategies and pursue. The good thing is that a combination of monetary policies and naturality has brought interest rates relatively down for issuers and hence lower cost of funding to them. This will be a re-start of a diverse sources of tools and mechanisms to finance our economic enterprises and projects using domestic resources.

Financial Literacy for a Shared Economic Prosperity

Financial Literacy for a Shared Economic Prosperity

Lack of skills, knowledge, competence and understanding about how financial markets works is one of the deterrents to participation in the financial markets and hence failure to benefit in the economic opportune and prosperity, in as far as capital being one of the factors of production, is concern. Research indicate that the lack of financial literacy prevents households from participating in the inclusive economic benefits due to non-participation in financial markets. The role of financial literacy should not be under-estimated. As more people live into a system where would have to decide how much to save for retirement and how to invest their savings for the better future, it is important to consider ways to enhance financial management skills or guide them in their financial planning, execution, and decisions.

Increasingly, individuals are being put to oversee their financial security post retirements. Moreover, the supply of complex and on-line/digital financial products has increased considerably over the years. However, many individuals who participate still lacks the necessary financial knowledge and skills to navigate this new financial environment. Youth – employed and otherwise, are becoming increasingly active in financial markets especially where the promise of quick returns is availed, their participation being accompanied/promoted by the advent of ever new financial products and services. However, some of these products are complex and difficult to grasp, especially for financially unsophisticated and illiteracy investors. At the same time, in many economies market liberalization and structural reforms in social security and pension sectors have caused an ongoing shift in decision power away from the government and employers toward private individuals. Thus, individuals have to assume more responsibility for their own financial well-being. 

The questions is: are individuals well-equipped to make financial decisions? do they possess adequate financial literacy and knowledge? Research on this topic indicate that financial illiteracy is widespread, many people lack the knowledge of the most basic finance and economic principles.

Some of the aspects for consideration as our society evolves includes answering questions such as: what is the importance of financial literacy and what is its relation to financial markets and economic development? Are financially knowledgeable individuals more likely to hold to participate in the ownership of economic prosperity via ownership of financial assets? Is there a causality relationship between financial knowledge and investing in financial markets? In all of these, the truth remains in that the lesser the understanding of basic finance and economic concepts related to economic growth (i.e., inflation, interest rate, compounding effect, diversification, etc) the limited is the knowledge of investing in financial assets – be it stocks, units and bonds, fixed deposits, etc.

Given what we little know — the limited knowledge about finance among us, says that financial literacy should not be taken for granted as we pursue financial mobilization for our economic development. The truth is that majority of households possess very limited financial literacy. Furthermore, given that financial literacy differs substantially depending on education, age, and gender — this suggests that financial education programs are likely to be more effective when targeted to specific groups. As such, financial and economic programs or policies and legislature actions should take into account the fact that when put in charge of investing for their retirement, financially unsophisticated individuals may not invest in financial markets, not because they lack funds for investing but largely due to lack of the specific financial knowledge. Thus, to work effectively, financial and economic programs need to be accompanied by well-designed financial education programs.

It is also fair to note that the challenge of limited financial literacy is not only for us, but financial literacy surveys conducted worldwide indicate that majority of the population in most economies do not have sufficient skills and knowledge to understand the basic financial products and risks associated with these products. Thus, many individuals may not adequately plan for their future and are likely to make ineffective decisions in managing their finances. The same is true for us where a significant proportion of the population have very limited understanding of financial products and services offered in the market. This is particularly the case among the rural poor but also across the relatively more affluent peri-urban and urban mass market.

As a result, efforts on improving financial literacy and educating consumers around financial products and services has become an essential means toward greater economic, social, and financial inclusion as well as an important complement to market conduct and prudential regulation. For capital markets in particular, investor education is important to promote greater retail participation in the market on a sound basis – in other words the best protection for investors is education. The same applies in other sub-sectors of the financial sectors i.e., banking, insurance, social security and pension, collective investments, and investment management, etc.

It is important to appreciate and recognize recent efforts by the Ministry of Finance and Planning, the Bank of Tanzania, and other stakeholders within the financial markets in embarking on various efforts putting strategies applied to educate and protect different groups of the population who are current and potential users and consumers of financial markets products and services. Sustained efforts are desired for mutual and commonly shared greater good.

DSE: Analysis of the 2021 Performance

During year 2021, the Dar es Salaam Stock Exchange (DSE) market performance depicted mixed results, however largely on the positive and depicting a bullish market outlook. There was an increase in market size and liquidity in the fixed income (bonds) segment of the market, as well as the growth in market capitalization for both domestic companies and in total. On the other hand there was decline in liquidity on the equity segment of the market.

Equity (Shares) Segment

Market Size                    

Total market capitalization — which covers all 28 listed equity securities –- recorded a five (5) percent increase compared to the market size/investors wealth during year 2020. The total market capitalization increased by TZS 715 billion i.e., from TZS 15.09 trillion in December 2020 to TZS 15.81 trillion as of 31st December 2021. This follows the increases in prices for some companies as well the listing of new shares in the market.

On the same note, domestic market capitalization covering the 22-domestic listed companies also increased by three (3) percent (or TZS 265 billion) during the year 2021. The total domestic market capitalization increased from TZS 9.16 trillion to TZS 9.43 trillion as of 31st December 2021.

The significant increase in prices in the following counters contributed largely to this increase: TANGA/SIMBA (increase by 120 percent), NICOL (up 62 percent), DSE (up 48 percent), CRDB (44 percent), and TWIGA (36 percent). Cross-listed companies whose share prices also increased during the year were: NMG (16 percent), KCB (14 percent), JHL (12 percent) and EABL (2 percent).

Even though there were declines on: DCB (whose price declined by 28 percent), JATU (18 percent), NMB (15 percent), SWISSPORT (11 percent) and YETU Microfinance (7 percent) – however the increase in prices of the above-mentioned companies outweighed the decline in prices in these companies and hence the over recorded increase of TZS 715 billion (equivalent to 5 percent). The remaining companies’ share prices remained unchanged during the year.


The value of transactions in the equity segment of the market declined during the year 2021. Equity trading turnover decreased from TZS 591 in 2020 (even though this was largely contributed by a one-off transaction on VODACOM) to TZS 104 billion in 2021. The declining is largely a result of reduced in foreign investors activities in the market following the impact of COVID-19 pandemic to many global fund managers with portfolio investments in our market.

The industrial and allied sector led in liquidity creation and investment activities, contributing about 47 percent of total liquidity during the year. This was followed by the financial services sector that contributed 45 percent, while the services and allied sectors contributed about 8 percent of total market turnover. Companies that led into liquidity creation were: TBL (TZS 27 billion), NMB (TZS 25 billion), CRDB (TZS 21 billion), TCC (TZS 15 billion), VODACOM TZS 6 billion and TWIGA Cement (TZS 4.8 billion). Other key counters were DSE (TZS 2 billion) and TANGA Cement (TZS 1.6 billion). Other counters with minimal investment and trading activities were: Swissport (TZS 0.9 billion), JATU (TZS 0.8 billion), NICOL (TZS 0.4 billion) and TOL Gases (TZS 0.3 billion).

Fixed Income (Bonds) Segment

Market Size

Total outstanding listed Government (Treasury) bonds increased by 19 percent (equivalent to TZS 2.5 trillion) — from TZS 12.79 trillion as of December 2020 to TZS 15.26 trillion as of 31st December 2021. Out of which outstanding corporate bonds stood at TZS 128.89 billion.


Trading activities in the secondary market fixed income/bonds increased by 21 percent during the year. Trading turnover increased from TZS 2.12 trillion that transacted during 2020 to TZS 2.57 trillion in year 2021. The increase emanated from both the increase in listing as well as the increase in the domestic investors (retail, financial institutions, and companies) to invest in the less risky financial instruments, given the economic uncertainty due to the impact of COVID-19 on businesses, trading, investment, and the economy. The increase in financial literacy is also a contributing factor.

Comparison with Other Markets

Compared to other selected stock markets in Africa, the index performance (in US$ terms) as reported by www.african-markets.com for the period ended 31st December 2021 are as follows:

ZSE All Share (Zimbabwe)10,997.06310.51%310.51%4603.74%
LuSE All Share (Zambia)6,059.6854.89%54.89%42.10%
GSE-Composite (Ghana)2,789.3443.66%43.66%23.58%
MSE All Share (Morocco)45,367.6840.05%40.05%49.96%
BRVM-Composite (West Africa)202.0839.15%39.15%27.03%
NSX Overall (Namibia)1,576.1427.54%27.54%20.31%
JSE All Share (South Africa)73,722.6324.07%24.07%29.12%
MASI (Malawi)13,296.2918.35%18.35%9.75%
SEM All Share (Mauritius)1,935.5117.75%17.75%-3.46%
EGX 30 (Egypt)11,897.4010.18%9.95%-14.26%
NSE All Share (Kenya)167.109.43%9.43%0.03%
USE All Share (Uganda)1,420.698.46%8.46%-21.10%
NGX All Share (Nigeria)42,716.446.07%6.07%59.14%
DSE All Share (Tanzania)1,897.504.39%4.39%-7.89%
TUNINDEX (Tunisia)6,976.872.34%2.34%-1.07%
BSE Domestic Companies (Botswana)7,009.611.89%1.89%-6.47%
RSE All Share (Rwanda)154.34-1.90%-1.90%7.20%

[Other] Tips for Investing in Stock Markets

Some of the key factors that influence returns on investment in shares, measured by dividends and capital gains, also impact share price performance. It is also true that factors such as demand and supply, fundamentally impacts price movements for listed shares, as it is for economic variables such GDP growth, inflation, interest rates, exchange rate, current account balance, etc which also affects the performance of the listed share prices. Today, let us look into other factors, i.e., how psychology and market cycles factors affect market prices.

Market Psychology

Market psychology is the overall sentiment or feeling that the market experiences at any time. Greed, fear, expectations, circumstances, etc are all factors that contribute to the market’s overall investing mentality or sentiment.

While financial theory describes situations in which all the players in the market behave rationally, such theory, however, do not account for the emotional aspect of the market that can sometimes lead to unexpected outcomes that can’t be predicted by simply looking at the fundamentals of the economy, or the underlying performance of the company, etc.

However, analysts normally use trends, patterns and other indicators to assess the market’s current psychological state in order to predict whether the market is heading in an upward or downward direction.

Market sentiment

Market sentiment refers to the psychology of market participants, individually and collectively. It represents the general prevailing attitude of investors as to the anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, financial performance reports, seasonal factors, as well as national and world events.

Market sentiment is perhaps the most challenging category because as it is, it matters critically, but we are only beginning to understand it. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a share’s future growth prospects, and the future may even confirm your projections, but in the meantime the market may simply decide to dwell on a single piece of news that keeps the share artificially high or low — albeit this can especially be prevalent in emerging and developed markets. And you can sometimes wait a long time in the hope that other investors will notice the fundamentals.

Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of overall movement of an individual stock has been attributed to market sentiment. In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors.

Emotions and perceptions

Share prices can change because of perceptions, greed, hype, momentum, fear, etc. Sometimes the stock market can be seen as the sum of the emotions of its human entrepreneurs, subject to the arbitrary human whims and flights of fancy.

According to a Wall Street saying, only two influences are at work on the stock market – “fear and greed. Most of the time they are in equilibrium, with greed only staying dominant long enough to produce the long-term trend depicted on a share market graph. The early 2000s technology boom was a good example of greed taking over. The Internet, and anything connected with it, became the spice of the moment and the technology shares skyrocketed in price. But when it all got too much later— some of us may recall what happened.

Bullish & Bearish

This is the other side of hype and momentum of the market. If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. When a bear market sets in, fear takes share prices downward, to a long, bitter winter of discontent. During a recession nobody wants to buy shares. Only in hindsight do people realise that it was the best time to buy shares. This is what “value investors” the likes of Warren Buffet recommend.


“To everything there is a season, and a time to everything, and a season for every activity under heaven”, says the author of the Bible’s Book of Ecclesiastes — could have been talking about the stock market as well!

Most stock markets show a distinct seasonal pattern. It has a regular seasonal correction at the end of the financial year. This is normally followed by a major seasonal rally i.e., beginning of the tax year, periodical financial reporting seasons, etc. The stock market is more likely to rise and fall in certain months than in others, i.e., portfolio or fund managers tend to withdraw from the markets at the end of each tax year to balance their holdings. They start spending again at the beginning of the subsequent tax year.

Market cycles

Besides psychological factors that determine market prices and rates of return on share investments, there is a totally different concept to consider and that is the market cycle.

Stock market cycles are the long-term price patterns of the stock market. It is very important for investors to know where the market is in its cycle at the time when they will be investing, particularly if they are entering the market for the first time.

Two key types of models that have been developed to help you to understand at what stage of the cycle the market is in are: macroeconomic models and intuitive market models. For either type of model, the two most important factors in determining the market cycle will be the interest rates and monetary policy. To determine whether interest rates are favourable for share market investment, it is necessary to calculate their ‘real’ level.

Along with macro-economic models, the other way to identify and predict market cycles is intuitive market models. Intuitive market models are imprecise and rely on subjective inputs from the investor – for example, where you think you are in the market cycle. Although they are partially based on economic conditions, they are mainly based on an intuitive understanding of how markets work.

Growing financial markets for economic development

In my recent past pieces, I have tried to explain the importance of connecting financial markets and economic growth. As an economy, following the financial sector and economic liberalization policies we have made some relatively good progress in the banking sector aspect of the financial markets — we currently have over 40 banks whose total asset size at TZS 36 trillion is about 20 percent of Gross Domestic Product (GDP) — although this is comparatively on the lower side, but still, good progress.

On the other hand, the capital markets segment of the financial, with only about 20 years old have seen less progress — understandably so. There are only 28 listed companies in the stock market, with equity market cap of TZS 15 trillion – is less than 10 percent of GDP.

Bank’s vital mandates, and operating model — provide loan finances to businesses and households, banks are particularly well placed to monitor their borrowers’ cash flows through the movements in the bank accounts of the people and corporates to whom they lend — somehow making easier for banks to identify and manage risks. In order to attract funds which, they then on-lend to business and households, banks raise finance by: (i) taking and creating deposits, (ii) issuing other capital raising instruments (such as bonds and commercial papers) and (iii) increasing equity investment via retaining profits or issuance of new shares to their equity investors. By their prevalence, strategic and operating model, the banking aspect of financial markets is well understood and used by many, compared to the other aspect of the financial market i.e. the capital markets.

As for the capital market — much as finances raised are long term in nature, mobilised from individuals and institutions who are not only savers but also have investment motives, this entails an immediate degree of risk where funds are invested but whose outcome depends on how well the business is governed and managed, there is also a relatively lesser degree of safety — funds invested can either grow or decrease in value. On the positive side, especially on the savers/investors perspective the capital markets provide a high degree of liquidity, particularly if the capital market is vibrant enough and where resources (time and money) required to raise finances by the issuer and liquidate an asset are relatively minimal. There is an upside potential for savings and investment increment emanating from capital growth and dividend income. This sub-industry requires investment banks, stockbrokers and dealers, investment advisers, fund managers and custodian banks as essential intermediaries to facilitate its existence and in enabling a vibrant market.

In our local capital markets, where there is a very minimal investment banking activities, collective investments schemes and fund managers, transactions underwriters, market makers, corporate finance and transactions advisory activities and services coupled with a stock exchange whose domestic market capital is less than 10 percent of the country’s GDP, and less than 100,000 active investors; definitely more is required — in terms of creating more awareness, in terms of encouraging businesses to use this long-term financing models, in terms of  policies and legislative actions that enhances the use of capital markets for enterprises and projects financing as well as using this tool for savings and investment purposes.

Building on the background above, in today’s article explain further the relevance of a vibrant financial market to an economy and why this consideration to our society is important, especially now – read on:

A growing economy requires investment to add into the stock of capital (plant and machinery, the built infrastructure, inventories, and buildings, including offices and housing) which, when harnessed to the labour force and supply of raw materials, produce the output that we call Gross Domestic Product (GDP). And that investment is financed from the supply of savings from both home and foreign savers.

Savings can be transferred to investors, whether businesses or households, in several ways. Businesses can retain profits to reinvest rather than distributing them as dividends, they can sell new issues of shares or bonds directly to savers; or they can borrow from banks. Equity, bonds, and banks finance are the essential building blocks of the methods companies use to finance themselves — although they be combined in a complex way. Several factors influence the form in which savings are transformed into investment, including tax treatment of different forms of saving and the willingness of different savers to take risk. But perhaps the most important concerns are the difficulty of assessing and monitoring the potential and actual profitability of investment projects. Equity finance (whether the sale of new shares or the retention of profits by companies) requires careful and continuously monitoring of a company’s activities. In contrast, one attraction of debt financing (whether bond or bank loan) as opposed to equity finance is that monitoring is required only when the borrower fails to make scheduled repayment.

Companies sizeable enough and willing to be listed in the stock exchange produce annual accounts showing profits as well as assets and liabilities, which are verified by independent auditors and scrutinised by many analysts. Savers who do not wish to rely on such public information can choose to invest in an array of financial intermediaries, such as mutual funds, collective investment schemes, unit trusts, hedge funds, pensions funds or [life] insurance companies. In that case, savers are relying on the judgement of the fund or assets managers of these intermediaries.

Over the past century, financial intermediaries have grown significantly as the wealth of the middle class has generally increased across nations. Substantial amount of wealth is now invested through pension funds, hedge funds and mutual funds. In other countries, retail/individual investors are discouraged to invest in their own, they are rather encouraged to invest through fund managers who possess the competence and skills to research, analyse and invest in a more informed fashion compared to retail investors.

It says there is a need for more fund managers, investment advisers, corporate finance and transactions support services advisers, collective investment schemes, which can mobilize retail savings and intermediate them for productive investment activities in various sectors.

The Role of Technological Infrastructure for Stock Markets efficiency

For many years, three powerful forces have been reshaping the operations and quality of the stock markets: regulation, competition, and technology. Let us focus on the last aspect – technology.

Technological development in the financial sector has massively transformed the stock markets in the last few decades. Consider the speed with which buy, or sale orders are handled and turned into trades and investments: in the pre-electronic era, the trade clock ticked at a slow enough pace for humans to follow price formation on a trade-to-trade basis; today, markets can change from microsecond to microsecond, and the trade-to-trade evolution of price formation cannot be followed by eye and shouting, only by computer.

Consider how trades are accomplished: in the past, they were made by human-to-human interaction, either face-to-face or by phone; in today’s rapid, interconnected markets, trades are also being made by computer orders meeting computer orders without direct human intervention (i.e., computer-driven algorithmic trading). There is another big one we can thank technology for: the availability of data. Not many ago, even for long-established exchanges with over 300 years of existence, the likes of London Stock Exchange or New York Stock Exchange, end of day, closing prices were reported in the piece of papers, and that was about it; today, most stock markets have electronically delivered, intraday data with a microsecond time stamp for quotes, prices, trading volumes, and market indices, and the sheer amount of this data is enormous.

Additionally, detailed audit trails are now available for regulators to peruse. Technology has transformed trading and provided new computerized marketplaces that bring buyers and sellers of securities together efficiently and transparently. Gone are the days of loud trading floors, red and blue jacket traders and dealers hoovering in the stock exchanges’ trading floor and a flurry of paper tickets to process. People who visit the DSE offices would normally ask, so where is the trading floor, where are brokers and dealers? And I tell them, we moved from that stage years ago, by the way you may now not even need to visit the stockbroker’s office physically to place your order – the DSE introduced the mobile trading platform – Hisa Kiganjani – on which you may place your buy or sell order from wherever you are and any time you wish. That’s how technology transformed the investment and trading experience in stock markets.

Today, software mediates the submission and prioritization of buy and sell orders and stock exchange matching engines facilitate trades with millisecond timing. Most trading orders are now submitted by software using complex algorithms that respond to live market data. Computer technologies underpin the essential functioning of today’s markets from price dissemination, to order matching, to the clearing and settling of trades and cash.

Let us cycle back and reflect the relevance of technological and fintech in the economic functions of stock markets. Stock markets perform three basic economic functions: consolidate buying and selling interests, enforce market rules that ensure fairness and promote trust, and connect investors to those who need capital to fund their business or public sector initiatives (e.g., infrastructure project). The goal of technologists working in the capital markets industry is to perform these functions as cost efficiently and profitably as possible.

The first market function to consider is bringing together buyers and sellers of securities and providing price and trading volume information.

Before the computer era, traders gathered on “open outcry” market floors, representing buyers and sellers, and following the exchange’s rules to discover prices and exchange ownership and cash. This concentration of activity was beneficial for investors since it maximized the chance of finding a counterparty and trading at competitively determined prices.

As open outcry trading has been replaced by screen-based markets, real-time market information that was once accessible only to those on the trading floor is now widely available. By providing trading information and a process for price discovery for standardized instruments – stocks, bonds, (and where applicable foreign currency, and derivative products — futures and options) – markets play an important role in facilitating buying and selling.

The effects of more information dissemination and reduced latency (from a trading decision to a completed trade) have enhanced liquidity and provided more trading choices to investors than they had when floor markets dominated.

A second function of markets is to provide formal rules for setting prices and matching orders. For instance, a market order to sell arriving to an open outcry floor market would be required to trade at the highest available bid price; otherwise, a “trade-through” violation has occurred. As discussed in the previous week’s articles, superior bid price that was traded through will lead to the seller receiving an inferior price. Most electronic order book markets execute limit orders according to “price-time” priority rules (the best priced orders arriving earliest will trade first). Enforcing rules and ensuring that participants’ orders are treated fairly generates trust and can be explicitly coded into the order matching software of a computerized market. In addition, conflicts of interest and opportunities for fraud arise in markets, so investors require assurance that market information is valid and reliable.

Third, markets intermediate between the sources of capital (investors) and users of capital (companies and governments) and provide liquidity. This means that, for instance, an investor managing a fund that purchases a borrowing company’s bonds does not need to hold the bonds until maturity. The buyer can reverse the decision by selling the bonds back to other buyers in the market. The liquidity of financial assets makes them more valuable than other assets that cannot be readily converted into cash. As markets have become more technologically advanced, more investors are willing to invest in businesses and can sell or buy to reflect their opinions and willingness to take on risk.

So, what is technology – as far as financial markets are concern? Well – in this context technologists refer to the “layers” of IT that are integrated to build an information system. The lowest layer is hardware and infrastructure such as servers, telecommunications equipment such as routers and switches, and data storage devices. On top of the hardware layer are shared systems such as databases and network directories. The top layer of the stack contains applications that enable users to perform business and financial market functions. At the bottom of the stack are the physical devices that process and store financial market data and that send and receive data over telecommunications network.

Liquidity and Price Determination in the Stock Market

As we may know economics encompasses two broad aspects: macroeconomics and microeconomics. Macroeconomics deals with an economy in aggregate and addresses issues such as inflation, unemployment, interest rates, and economic growth. Microeconomics, on the other had operates, as its name indicates, on the micro level, addressing household consumption (and investment) decisions and the production decisions of entities within the economy.

Furthermore, there is parallels (and a few differences) between a standard microeconomics formulation (a household’s selection of an optimal consumption mix) and a standard finance/investment model (an investor’s selection of a portfolio that optimally combines a riskless asset (such as cash) and a risky equity portfolio). In finance and investment, the key formulation is the achievement of an equilibrium price.

Price Formulation/Discovery: In both formulations (household or investment), price plays a central role as it guides the decisions of both households and investors. Along with the decisions of households and firms, determination of an equilibrium price is of paramount importance. The price variable is so important that microeconomics subject carry the name “price theory.” But it is one thing to analyze price equilibrium in a theoretical model, and something else for an equilibrium price to be attained in a real-world market, especially in the financial markets where prices are changing with great frequency, as is the case in stock markets. It should be known that the primary function of a financial marketplace such as the Dar es Salaam Stock Exchange is to facilitate attainment of equilibrium prices, an objective referred to as price discovery. However, it should noted that effective price discovery, is not easily achieved.

Role of Information: the relationship between fundamental information (fundamental information encompasses a vast array of items that pertain to individual companies, to industries, and to the broad, macro economy) and the price of shares is critically important. In investment, the relationship is considered with respect to portfolio formation. In corporate finance, the relationship is considered with respect to asset valuations and the determination of a company’s cost of raising capital.

The transformation of fundamental information into share prices starts with the type of information set and then extends to investors (both individual and institutional) and then to the marketplace where shares are traded and share prices determined. In so doing, fundamental information is transformed into three key factors: (1) expected future returns, (2) uncertainty concerning future returns (an investment’s risk), and (3) the difficulty of buying and selling shares in the market (liquidity risk). In broad brush, this is how it works. Assume that a share’s expected 1-year forward price is Tsh 1,000. If the share is currently priced at Tsh 870, the expected return on the investment during the one-year span is 15 percent. If, concurrently, the risk-free rate of interest is 10 percent, the share is priced to yield a 5 percent premium. So, what accounts for the premium? Two things: risk and illiquidity. Risk exists because what a share’s actual price will be one year from now is unknown in the present.

The share’s expected share price is Tsh 1,000. One year later, the price could turn out to be higher than Tsh 1,000 or disappointingly lower. Thus, the investment is risky, and very importantly, most investors are risk averse. Accordingly, the premium compensates them for accepting risk. But is that all it compensates investors for? No, investors are also averse to illiquidity. Risk pertains to a future share value, while illiquidity matters when shares are bought or sold. Here is a simple, definition of what the term liquidity means: the ability to buy or to sell shares reasonably quickly, in reasonable amounts, and at reasonable prices.

Let us back up for a moment. How are investors compensated for risk again? By a risk premium. How are they compensated for buying shares that they know can be difficult to sell in the future? By an illiquidity premium. Accordingly, let us repeat: with the risk-free rate at 10 percent, buying shares at TZS 870 while expecting a 1-year forward price of TZS 1,000 yields a premium of 15%, and this premium compensates investors both for accepting risk and for bearing the cost of illiquidity. So, what is liquidity again? As we have just said, a good definition is the ease with which shares can be traded. Can they be traded quickly? Can they be traded in reasonable quantity and at a reasonable price? If the answer is yes, yes, yes, then we can say that the market for a company’s shares is liquid.

But what benchmark might there be for assessing, for an order of a given number of shares, the time taken to fill it and the price at which the trade has been made? And can the assessments of time, price, and size be aggregated into a single quantitative measure of liquidity? The answer is they cannot, so where do we stand? Hang on, we return to a further discussion of liquidity. For most shares, speed may not an issue especially in today’s modern electronic markets. What about size? Size may not be an issue for smaller, retail-sized orders, but it is a major challenge for institutional-sized orders (for instance, an order of 50,000 shares, 100,000 shares, or more). What about price? Clearly, in our environment, trading at a “reasonable” price is difficult to accomplish, sometimes it is difficult to even know what a reasonable price is – because at times, price rises (or falls) over a series of trades. What might explain this volatility? Finding prices that best reflect the broad market’s desire to hold shares is complex and dynamic; but this process is what is called price discovery.

Let’s go back to the role of information in price discovery — one reality is a root cause of much of the complexity that surrounds liquidity creation, and price determination: investors commonly differ in their interpretations of the fundamental information that applies to specific shares, industries, and the broad economy, and their differing interpretations translate into their having different expectations about what a stock’s future price will be. This is what is referred to as divergence expectations. What are divergent expectations attributable to? Answer: information sets are enormous in size, sometimes incomplete, complex, ambiguous, and inaccurate. What is the effect of expectations being divergent?  Well, it accounts for: (i) difficulties and complexities in discovering reasonable prices in a marketplace; (ii) making trading and investment become a challenging activity; (iii) prices being excessively volatile in brief intervals of time; (v) the design of stock market structure being of critical importance. That’s why then information and its interpretations become critical.

Here is how it works – stock market participants price their orders with regard to the future values that they expect their investments to deliver. Would a community of investors have identical expectations of future values (homogenous expectations), or might their expectations differ (divergent expectations)? The distinction is of major importance. Here is one reason why. If investors’ expectations are homogeneous, shares can be thought of as having fundamental (“intrinsic”) values that can be found by stock analysts. If investors’ expectations are divergent, shares do not have fundamental values, and share prices must be found in the marketplace where trades are made. And that’s why, I repeat — price discovery is a major function of a stock exchange.

Exchange as an exit Route for Investors in private companies

Recently, the DSE established a pre-IPO segment (named: “Endeleza”) within its listing platform where private companies in need of private capital are listed – for the purpose of profiling and visibility enhancement – and hence get access to private fund providers, targeting entities like private equity funds, venture capital funds, family offices and foundations, angel investors, development financial institutions and qualified individual investors. The fundamental objective for the DSE is to also develop a pipeline of companies for potential listing. The potential listing could be achieved via: (i) need for further capital by these companies and which could be obtained from public capital via IPO; or (ii) private investors exiting in their initial investment via IPO. 

As we know it investors (public or private) invest in companies where in some cases they would also participate in the operations and management of the company they have invested into. Such investors mostly would have an investment plan which indicate what investment returns they are targeting, both in terms of profit sharing (dividends) and capital gain — in the case of their exit. 

In recent years specialist investment structures, Private Equity (PEs), Venture Capitalists (VCs), and Fund Managers for Family Offices, Endowment funds and Angel investors has emerged as an important player in the investments in private companies. For our case, since these kind of specialist investors are virtually non-existence, they mostly access us via a neighbor country. 

In whatever form, investors do invest in companies for specific purposes and period. During the end of period, there are various exit routes for them. Each year, new investors enter in companies while other investors exit from companies. In our case, most considered exit route has been trade sale/buy. This is most preferred route which was pursued even during our privatization of state-owned-entities. That is why out of more than 300 companies that the Government exited, 99 percent of exits were conducted through trade sale, than via IPO. However, Initial Public Offerings (IPOs) via stock markets has many benefits across.

Before I explain why the IPO option make more sense, let us first understand how exits occur. Traditionally, investors — private and public rely on two kinds of buyers: Secondary buyers and Trade buyers — these being buyers who are looking to gain market share or gain an entry to the new market. These approaches have long served the investment industry — it is easy and more effective to sale something to someone who is interested, similar in this case, selling a company to individuals or firms that have an interest to increase their market share within a certain jurisdiction or market a new entry into a new market via buying a company that has experience, customer base, distribution systems, relationships with various stakeholders, etc — seems a viable. Now, this is true, except for a few things —one; it is not easy, in a private market to gain a timely access to a trade buyer due to inefficiencies especially those involving lack of information. two; It takes relatively long time and consumes a lot of efforts to negotiate a fair trade based on fair price and value of the business and its shares being informed by a proper due diligence.  In fact, a recent report by Deloitte Survey – Africa Private Equity Confidence Survey, indicates that respondents to the survey indicated that they were grappling with difficulties in exiting in companies they have invested in due to difficulties of getting a right buyer in the private market.

For this reason, that is why IPO consideration makes great sense — both for private companies and state-owned entities – why and how? First, exiting through IPO route provides investor(s), with exit motive, the fastest time to exit their portfolio firms as compared to other routes, as indicated above.

Understanding the relevance of IPO as an efficient and most beneficial exit route for investors, the DSE introduced the Enterprise Growth Market (EGM) segment, a segment that allows small and medium enterprises as well as new ventures to access public capital via selling of shares or as an exit mechanism for investors who wants to cash out and list these companies into the Exchange. In addition to the EGM platform, the DSE have also introduced the “Endeleza” segment to allow private companies get access private capital via the exchange mechanism.

Now, we understand that most specialized investors require a 5–7-year investment cycle prior to exit considerations, and it is relatively difficult in some cases for these investors to get individual investors ready to invest in within their targeted multiples and ratios – neither are the promoters and anchor investors to the business would have the necessary funds or the appetite given the valuation and pricing of the exit transactions.  This being the case, that’s why the EGM becomes useful, where companies may opt to exiting via public markets. By the way the benefits of IPO and listing into the stock market that I alluded into earlier include, but not limited to tax incentives, enhanced corporate governance, business sustainability conduct, increased investor base for potential future capital raising, enhanced company profile among key stakeholders, attraction of good talent, confidence from debt financiers and suppliers, etc. 

Furthermore, experience shows that whenever the investment holding period is shorter, particularly for PEs and VCs, IPO exits are the most favored approach compared to other exit methods. Importantly, this route also provides the entrepreneurs or the anchor business enterprise owner with opportunity to regain their shareholding in the company, that they somehow lost when the exiting investor or investment firm joined the company.

To conclude, a considerable number of investors, finds it hard to make exits in invested companies. Therefore, for the sake of both the investment management industry growth and the local capital market growth and continued survival, it is important that exits should begin considering the local stock market as an important exit option for investors in private companies, as it is for need to raise sustainable and patient capital — via the EGM or MIM segments. However, prior to that the “Endeleza” segment comes handful for private entities in need of private capital.

On the diversification of financing infrastructure development

Sourcing of funds to finance infrastructure development could be diverse – taxes, equity issuance, issuance of infrastructure bonds, green bonds (for environmental conservation and sustainable infrastructure projects, etc.), loans from external institutions, etc. Historically, this whole issue has been fraught with difficulties, and to contextualize– this is the case for us, as it is for many others. One of the major challenges, especially in recent times has been that external development finance institutions, often imposing stringent policy conditions on their lending, have minimal appetite for some of our “perceived” risks or their balance sheets lacks the necessary leg-room like it used to, or interest are shifting and refocused.

Furthermore, major lenders have historically been more active in financing social infrastructure projects. Their approach to our development has by and large been related to “poverty alleviation” rather than “economic development”. As we know it, financing social infrastructure for poverty alleviation objectives aren’t the same as financing economic infrastructure which plays a critical role in spurring economic growth. While social infrastructures are equally relevant and important for economic development, however, economic infrastructure is more urgent. The process of wealth creation and capital accumulation are facilitated largely by investments in economic infrastructure.

Now, financing of infrastructure development that will result into bridging the infrastructure deficit would continue to be a mix, however tilted towards own domestic resources would be part of the game changer. And the place to start would be the state of our domestic financial markets, particularly capital markets. This aspect requires an enhanced positive consideration by actors from public and private sector for market development. Nascent markets need some form of pro-activeness to develop them, how? by more issuances, new and diverse financial products, more actors and facilitators of financing transactions, the wider and diverse investors base, etc. If the market is developed and become more inclusive (from the issuances, financing and investment), the people will take ownership to our development, will enable achieve inclusive economic empowerment agenda (as far as capital as one of the key a factor of production is concern), it will result into, or domestic savings intermediated into financing significantly our development.

I clearly understand – whether from public or private sector actors’ perspectives – that when you mention equity financing of state-owned entities or private sector entities it means dilution of ownership and that worries some people, but this is a matter required just a bit of understanding and time (in a broader sense) — but then as we wait for that to happen, why don’t we start with debt? This is rather more known and understood by many. The positive side of this is that our current market conditions support raising finance via issuance of debt instruments, bonds — there is an increased appetite for investment in bonds, but we lack the diversity (product-wise) of issuers. So, what is a bond? a bond is an instrument of indebtedness of the bond issuer to the bondholders where the issuer owes the holder a debt and, depending on the terms of the bond, is obliged to pay them interest (coupons) and then repay the principal amount at the maturity date.

Bonds can be issued by private and public sector economic agents, apart from the central governments which is currently issues general obligation bonds; and can be issued for project-specific bonds i.e., bonds issued to finance specific infrastructure or industrial development projects, and recently given the appetite for the sustainability (or ESG) agenda – there could be issuances of bonds for green projects financing, social infrastructure projects, sustainability-linked bonds, etc.

Currently, our DSE-listed bonds market is worth about Tsh.14.5 trillion, but 99 percent of these are Treasury bonds, and only 1 percent are private sector issuances corporate bonds. There are no municipal bonds, green bonds, infrastructure bonds, sustainability-linked bonds, social bonds, etc

Upon addressing the legal/regulatory and structural issues, our local governments can issue municipal bonds, either as general obligation bonds secured by a local government’s pledge to use various legally available revenue resources, including levies, royalties, or any other sources to repay bond holders. But local governments may also issue a revenue specific bond for infrastructure development– these are bonds issued but whose proceed will be used for specific identified projects that can be repaid through a variety stream of revenue sources or cash flows emanating from the project(s).

But also, our government agencies – the likes of TANROADS, TARURA, TRL, TANESCO, DAWASCO, TAA, TPA, etc may also issue infrastructure bonds for their various projects. Our higher learning institutions, such as universities and colleges may also issue bonds for lecture or accommodation infrastructure, backed by projected rental incomes; etc. Private sector corporate entities can as well issue more bonds for a variety of use. For example –our banks can issue green bonds targeted to use proceeds to on-lend into entities with projects related to renewable energy, pollution prevention technologies, aquatic biodiversity conversation projects, clean transportation, green housing, sustainable water and waste management, etc. But also, entities like water authorizes, TANESCO, NHC, etc can directly issue green and sustainability-linked bonds. 

One of the major benefits for these issuances, in addition to facilitating growth of our capital markets, algin our finances to the sustainability agenda, attract foreign capital via our local market and currency, it also gives bondholders more inclusiveness and ownership on these projects while allowing investors the opportunity to directly invest in bonds that finance economically and socially projects that are beneficial to them – that way democratizing development ownership.

As I conclude: roads, ports, railways, airports, bridges, irrigation, canals, recreational parks, schools, hospitals, water and sanitation projects, etc in many developed economies were/are largely financed with funds raised via capital markets i.e., issuance of bonds or equity instruments. From records of history, big infrastructure projects have been financed with such funds — mainly because fiscal budgets are often unable to support such significant expenditure. Country’s balance sheets in many cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development – that’s where capital markets development becomes a necessity for facilitating growth and development.

On What to make of the Stock Market Movements

Anyone who is an investor, or a just keen observer, or a stock market analyst knows that stock prices fluctuate from time to time, for good and sometimes not so good reasons creating temporary moments of “highs” and “lows”. For many, especially stock analysts and active investors, these fluctuations can potentially be very stressful. The fundamental aspect to this, however, remains true, in that the success in the stock market investment requires patience and a willingness to see past fluctuations to study the bigger picture over a horizon. With time, you gain the experience to better interpret price fluctuations; with time, history tells, stocks always have the upward trajectory. So, a rational investor should be able to understand and appreciate this truth.

However, as it is with human nature, rational investors are not many out there, that’s why lows and downs moments are highly highlighted to the extent of, in some cases, eliminating altogether the memories related to good moments when we enjoyed the highs and ups. I have just mentioned “human nature”, and to bring my point even closer to our “human nature” – one might say, the stock market can quite tell a story closer to a love story, somehow complete with break-ups (and make-ups). And as it is with such relationships, split-up doesn’t always mean a relationship is dead, sometimes an “end” could just be a set up for a new beginning, with reconciliations and re-corrections. And therefore, much as we have seen the downward trend for certain moments, there will be a period of reconciliation and re-correction – but is it always the case? The answer to this we have to consider the fundamentals of investments and stock markets theories. Theories that have been tested by history and proven, in most cases, to be meaningful for referencing. Referencing to our piece today, I would like to refer into the “Dow Theory”.

Charles Dow, the founder of the Wall Street Journal and inventor of the world’s first stock market index, was the first financial analyst to scrutinize stock market fluctuations and interpret its bigger picture. He studied the ups and downs of the market and developed the so-called “Dow Theory” which, among other things, defines a “trend.” All stocks move up and down over time, creating temporary “highs” and “lows.” When a stock creates a sequence of “higher highs and higher lows,” it is trending. This suggests that the motivations of market participants are in favor of price moves in one direction, either up or down. Either the trend is up, and demand for stock is high, or the trend is down, and more investors wish to sell stock than buy it. And, so – this boil down into the fundamental matters of demand and supply as well as investors’ sentiments, which then determine the efficiency in how stock prices are determined and in which the market behaves.

So, how does this work? Let us start with the supply side — for any stock, most times there are a set number of shares outstanding. When you want to purchase shares, you must compete with other buyers for the limited supply available in the market. Where does this supply come from? Shares are only available to buyers if their current owners choose to sell them. Thus, supply in the stock market consists of stock being sold. If few or no traders want to sell their stock, then there is no supply and buyers can have difficulty opening positions.

Demand — when you want to sell shares, they can only be liquidated if someone else wants to purchase those shares from you. Thus, your supply must be met by demand in the marketplace. In the stock market, demand equates to buyer interest. If no one is interested in buying the stock you wish to sell, then you may have difficulty getting rid of it. In such a case, sellers are competing for the few buyers that are present.

The goal of any stock market is to facilitate the trade of securities. Stock market ups and downs are directly caused by an imbalance in supply and demand emanating from both fundamental and sentimental based factors. Prices remain consistent or “flat” if supply and demand are approximately equal. If there is more supply than demand, then sellers must accept lower and lower prices as they compete for buyers’ interest, and the stock drops in price. Likewise, when a stock is in high demand, buyers must pay higher and higher prices to compete for the few shares available, and the stock increase in price.

As indicated, demand and supply (which are determinant of stock prices) have fundamental and sentimental origins. Sentiments! yes — the relationship between supply and demand in the stock market is often called “sentiment.” When stocks are in high demand and prices are rising, the sentiment is mostly positive which leads to fewer stock owners wishing to sell and more investors wishing to buy. Extremes in sentiment ironically precipitate major market fluctuations. When sentiment reaches a positive extreme, a stock market drop is often imminent. “Contrarian” investors, the like of Warren Buffet, monitor market sentiment and trade opposite the prevailing attitude. The cause for this is simple. When most participants in the market have a similar opinion, there is more room for some of them to change their minds. When sentiments are more balanced, there is more room for skeptical investors to eventually join the prevailing attitudes and start a trend. Strong opinions in the masses rarely last for long, as more balanced sentiment is healthy. To conclude, despite the up and down swings of the stock market, to maximize your investment returns, apply some pro-active investment management philosophy. This is imperative –particularly in stock selection that is informed by a view on the market cycles, company returns and diversification as you try to ignore the rumors you hear about how stocks are valued or the stock market behaviors. Try to resist the naysayers and their model-driven predictions about how the market can go, in most cases their forecasts have proven to be not more valuable than a coin toss. In all these, it is good to try and maintain your cool head and handle well your emotions. Yes, there are seasons that are not so good, but if only you have the patience, the growth trajectory is always there.