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.

On the democratization of finance and wealth for inclusiveness

The history of financial markets is to some extent a history of deliberate government policies to disperse financial interests and economic ownership across a wider segment of the population. Historically, such policies have helped in the democratization of finance for inclusive socio-economic development. We seldom stop to reflect/realize the extent to which we live in a society that is structured by financial design – for our shared prosperity. This history has brought us, (the humanity and societies), to certain financial arrangement that we have, without noticing or being conscious about how these arrangements works for our betterment and in creating a good society.

Yes, a modern market economy seems to many observers increasingly run by a relatively small number of business leaders who are, by the virtue of their financial and general business savvy, becoming excessively influential. These few individuals are sometimes accused of being insensitive, but also praised for being responsible for setting the pace for the society as a whole – given their entrepreneurial ambitions, aggressions, and dispose.

Yes, it’s agreeable that a society needs to make it possible for relatively few individuals (i.e., political leaders, policy makers, business owners and managers) to use their personal judgement to decide on the direction of societies’ major activities, however if this could be achieved in a manner that is also inclusive.

This discontent is nothing new, the kind of loss of sensitivities among the wealthy and the loss of a sense of individuals participation in society was a concern that occupied by leading economist of the 20th Century, such Friedrich Hayek (the Austrian Economist), in his book: The Road to Serfdom – where for him, it is the excessive government intervention which is a source of the problem for lack of a sense of humanity in our finance and business undertaking, rather than the practices of big business, but then he also wrote of government being captured by big businesses. Excessive reliance on such large controlling entities, Hayek believed, lead to a defeated attitude, the attitude of serfs.

According to Robert Shiller (Professor of Finance and Economics at Yale University), in the modern capitalist system with all its regulatory machinery, it may, if power within it does not become too centralized and institutionalized, be liberated from just such serf mentality. He says, if the right rules are in place, they may pave way for the development of a multitude of creative organizations that can achieve far more than any individual, however free, ever could. These set of rules and assumptions that allow orderly businesses to be initiated and then to proceed represents a kind of social capital that is enabling for creativity.

According to Hayek, dispersal of information about the economy and its opportunities across millions of people – with their different situations, locations, eyes, and ears – is where the society and its political and business leaders should focus on. He argues that the society need controls to facilitate, on top of these arrangement, a dispersal of opportunities, but its control as well. This can be achieved by encouraging broader public participation in ownership of factors of production and especially shareholding of corporations, or by giving tax preferences to small firms, or by other means to encourage the dispersal of property holding throughout the population.

Collectively, societies can make deliberate decisions to plan a broader and more inclusive financial market. Such plan could be modelled after the traditional communism –experienced from the 1960s to 1980s, which similarly sought to equalize the ownership and control of economic opportunities. By the way, this idea also reflects on what is known as “ownership society”, referring to a society in which citizenship and responsibility are encouraged by the widespread ownership of and control over properties and assets.

So, how can this be achieved — land reform? –  Policies to disperse ownership of capital must be concentrated on land. In the world history, land reforms (and there have been many in many countries, especially in the nineteenth and twentieth centuries), while sometimes imposed harshly, but usually represent the real social progress, and helped many economies in democratization of finance and growth. So, whether in Brazil, Canada, Ethiopia, Namibia, Syria, Taiwan, Zimbabwe, Russia, South Korea, or China, you mention them, even the US – a good part of the sense of equality and a common good existing in large part of America today owes its origin, at least in part, to their democratization of wealth via land reforms.

These land reforms, while sometimes imposed harshly for some countries, represent social and economic progress in a society, helping economic growth – especially the aspect of land titling and its impact on easy access to finance and financial services, financing of business enterprises, lessening of income inequality, the approach to agriculture and agricultural enterprises, in the creation and generation of wealth within a society, in the increase in the proportion of homeownership, etc. To achieve these–land policy should have aspects of equitable allocation.

Homeownership – this is yet another important aspect of democratization of finance, or rather using finance for economic empowerment and creating a good society. Again, going by world history — as societies and economies become more urbanized, governments have embarked on policies that enable large home-owning population as opposed to the development of huge corporations that operate rental properties for the public. This has been the case in the UK with their concept of “property-owning democracy” in the 1930s, the “home building programs” of 1950s and the “program of selling council houses to renter inhabitants” in 1980s. Similar examples has been in the United States especially under President F.D. Roosevelt’s New Deal where the Federal Housing Administration was created in order to provide for government insurance of new mortgages and creating the “Fannie Mae” to buy mortgages from their originators to support the housing market. So, has been the case with China, with its communist ideology, that later came into the ownership society concept, and in the late 1990s China created a Housing Provident Fund aiming at making homeownership and affordable housing a priority and a compulsory saving plan.

The idea of homeownership pops up almost everywhere now, why? because it promotes the ideals of independence and personal responsibility where families are encouraged to make sacrifices to have a home in which they are responsible and accountable for, including the use of house for accessibility to finance and financial services and for supporting other aspects of human wellbeing such as entrepreneurship, business management, etc.

The basics of successful investing in shares

How do you pick shares that are likely to enhance your wealth, or at least not deplete what you already have? How do you invest only in shares that will mostly treat you well and let you sleep peacefully at night? Well, the answer varies from person to person, but here are some tactics that may help you identify shares of the businesses that satisfy both criteria.

Avoid complicated businesses

Just like in any other aspect of life, it is better to stick to what you know makes sense, when it comes to investing in shares – select shares for companies whose business you can easily understand. Even better, buy shares of companies whose products or services you regularly use.

Fast-moving consumer goods and groceries, or a company that sells wireless phone services and operating mobile payments platforms, a bank, or a company in cement manufacturing – are relatively straightforward business model.

Understanding company’s business model and products gives you a clearer view of what factors contribute to its success.

Stay with established businesses

It can be tempting to buy shares of that fast-growing company or to participate in that hot Initial Public Offering (IPO) that’s all over the news; however, it is sometimes wiser and safer to resist the urge. If you are not a “qualified investor”, or venture capitalist or a private equity investment officer – don’t engage in the business of taking risks you don’t know.

Investing requires due diligence, analysis, research, and reflections before deciding to deploy money. This being the case, it is wise not to invest in unproven companies promising to reward you out-sized returns — such companies often also come with a high risk of catastrophic loss.

Focus instead on companies that are known, have proven prosperity through good economic times and bad. They may not make for thrilling conversation material at parties and gatherings, but they stand a better chance of building your wealth over time.

Be careful, spot trouble

As it comes to people who manage the company that you are about to buy shares – it is fair to question if executives have previously been charged with unethical behaviors that challenges their integrity? or if outsized yields are being promised, you may ask if the company is not running a Ponzi scheme? what about the potential for heavy penalties and sanctions – for example, does the company dump toxic sludge into waterways?

What about issues of malpractice which may take years for a company to live it down. Take note — distrust weighs heavily on companies’ share prices – the outcomes of which is loss wealth for an investor. There are better places to put your hard-earned money to work, don’t be associated with businesses in trouble.

Revenue growth is crucial – remember that

If a company isn’t selling an increasing amount of goods or services to an increasing amount of people, then there’s trouble on the horizon. A company can boost earnings for a year or two by cutting costs and becoming more efficient, but if sales are stagnant, profits will eventually stagnate, too.

It is therefore wise that you look for companies with long-term revenue growth rates that exceed your local rate of inflation, and in some cases exceeds the economic growth rate (measures in GDP).

Profit is the King — insist on profitability

In your due diligence, research, analysis, financial modelling, etc. remember to take a look at a company’s profit history. Has it reported negative earnings at any point in the recent past? If so, refrain from buying shares in such a company unless you thoroughly understand the reason for the loss.

Good redemption stories are good to hear, but turnarounds and cyclical shares are tough to analyze. Stick with a business that earns money year after year, and sleep better at night.

Are you a retail investor? look for dividends

Good companies rarely reduce their dividend payments. When you buy a share, you become a part owner of that company. As an owner, a mature, healthy company should be able to pay you a portion of its earnings in the form of a dividend every year.

If the amount of this dividend is cut, or remains stagnant for several years, there better be a very good explanation for it. If there isn’t, there are other, more profitable places to invest your money.

Retail, as opposed to institutional investors – prefer dividends payments, not profit retentions. Individuals have needs – hence real cash as return on their investments; this is why dividend payment matters.

Watch out for debt – may be a determinant for your dividend

Companies with heavy debt loads suffer disproportionately during tough economic times and have fewer resources available to them when expansion opportunities arise. What’s more, they also have less flexibility to issue dividends or buy back shares.

Even as we live during the challenging times of COVID-19 pandemic you may have already noticed some forms of the struggles for some companies. Debt-strapped companies have serious issues about paying off their loans and staying afloat.

High P/E ratios? Be attentive

The price-to-earnings (P/E) ratio is one of the key instruments in financial and investment analysis, it’s one of the most valuable metrics in your analytical toolbox.

As a general rule, shun from shares that depicts the relatively high P/E ratios. Instead, shares that are priced at a low multiple to their most recent twelve months of earnings (i.e., below 15x), tend to outperform shares with high P/E ratios – i.e., the market expects shares with high P/E ratios to grow their earnings at high rates. And high expectations often end in disappointment.

Beware of dilution

When a company increases its number of shares outstanding, it’s rarely good news for shareholders.

Issuing new shares dilutes existing shareholders’ stake in the business. Acquisitions funded by the issuance of shares dilute shareholders and expose the company to the risk of a new venture. Rights offers dilute shareholders who don’t have additional cash to invest in the business and indicate that the company may be over-leveraged.

Unless there are good justifications – always stay in favor of companies whose total share count remains level from year to year.

On why we need a culture of saving and investment

For sometimes now the Dar es Salaam Stock Exchange have been running an edutainment challenge — DSE Scholar Investment Challenge — whose objective is providing financial literacy to students at higher learning level and secondary schools, specifically on matters of savings and investment in financial instruments in financial markets.

This is in trying to address the common theme among us, that financial literacy is relatively low, expectations for us is that the next generation will be better informed about financial markets and how they work in addressing our savings, investment, risk management and wealth creation needs. Though the program we challenge students to invest in financial assets (i.e., share, bonds, cash, etc).

As it is said in the Bible book of Proverbs 21:20 – [There is] treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up.  And Proverbs 13:11 says – Wealth [gotten] by vanity shall be diminished: but he that gathereth by labour shall increase.

Thus, educating oneself, pursuing the discipline of savings, and investing for the future is part of the wisdom towards the journey of financial freedom. This says that we need to develop a saving-investment culture and identity.

Going back to personal finance – in between overspending to financial setbacks to incurring massive debt; or by simply not making enough money, there are several huddles that one must overcome. Therefore, cultivating the habit of savings may be a necessary hindrance (if it comes to that) and is helpful in many aspects of life. A good saver set aside funds for business, is debt free, has already made a right and bold step towards financial freedom. A good saver can also reach certain goals that cannot be attained on the limited income that one gets from their daily jobs.

From the country perspective — economies with high savings rates have the capability to withstand financial shocks and channel more financial resources towards critical sectors of their economies. However, building this resilience is steeped in a culture of savings and investment. Now, here at home — less 20 per cent of the population have a bank account, only about 1 per cent have an investment account at the stock exchange, these similar statistics are applicable in insurance and pension and collective investments.

Now I understand the fact that ours is a developing nation at the lower middle-income category, that those among us with formal employment are a handful few albeit with low paying jobs challenging our ability to meet our current cost of living therefore no or minimal disposable income and therefore nothing or less to save and invest. I understand all of that, but even within such circumstances there is opportunity to save for investment. If we tilt the cultural change, we will start to see that there are those whose circumstances are better and could save and invest more than they already do. It requires a discipline and a propensity to save than to spend. Therefore, this becomes a question of choice. As I said in the last week’s piece, one need to assess his/her financial health, make a saving-and-investment plan, make choices, and pursue it consistently. But, in doing so one need to have a clear picture of sources of income, expenses, savings, investments — then continue setting aside a portion of income for savings and investing, don’t spend unwisely; save and invest.

As for our collective efforts and our betterment – what is being currently implemented by the government in strengthening property rights by way of land titling goes a long way in promoting greater savings and investment around leveraging property into access to finance and investment which would be cycled back into savings and investment. Along with this the government’s continuous issuance of treasury bonds and bills to mobilize financial resources for infrastructure development and budget support is another key mechanism towards motivating individuals and institutions to save – availability of financial products and a market for the same is fundamental in incentivizing savings and investment in the economy.

There is a potential of extending these actions into issuances of other similar financial instruments (by public and private sectors) the likes of infrastructure bonds, green bonds (for environmentally conscious projects), blue bonds (for the blue economy), sharia-compliant sukuk bonds, or social impact financial instruments for social-economic projects, these would encourage more savings and investments as it covers the wider investor base and a saving community.

Personal financial planning for a better retirement

Our priorities, goals and needs change constantly as we journey through life. For instance, lifestyle choices like cars or holidays or fancy stuff dominate our thinking as we start our career; then as years go by imperatives such as sustainable rental expense, owning a house, etc. comes along and gets priority. Then we progress family matters such as children’s education, health care for the family, providing for the growing family, etc. gets into the top of the list. And, through all this, we are also required to keep tabs with the possibility of a comfortable retirement and some form of “financial freedom”.

Juggling these competing financial needs, on a limited and finite income stretches us to the core. However, part of the secret to succeed in these challenges is fundamentally premised on the need to plan, starting early, and the implementation of what is planned.

Have you ever heard “financial freedom”, or “financial freedom fund”, or “the Rule of Seven”? Ok – maybe not. Either case the purpose is to encourage you to make regular sustainable savings for investment in financial assets in the pursuit of creating funds made up of these investments made in “income producing financial assets” such as in dividend paying shares; or income-earning deposits, treasury bonds; rental income from real estate’s investments; or some form of royalties. The ultimate objective for this being to enable a retirement life that is a relatively similar life to the one you had when you were earning regular income from your day job, during your active career years.

For the actualization of this you should get into the habit of planning and saving and investing, early in life. The earlier you start the better, because the small amounts you save – with a “compounding effect” turns into large sums over time. When you are trying to accumulate wealth for future, the longer you have your money invested the more it will grow in value.

The other benefit for starting this process a bit early is the way it helps in changing the mindset – they say, “practice makes perfect”. By practicing early, you begin to see savings not as some sort of luxury but as an essential part of your life’s success. Basically, savings should be an integral piece of your planning, the same as you plan for rental expenses, loan repayments, domestic utilities, school fees, etc. The best way to approach this is to have personal financial plans by way of periodical consistent sustainable allocations. While we are into this — without conscious and deliberate efforts to ensure thoughts are put down on paper – the follow-through will also face challenges. Unfortunately, for most of us matters of income and spending are approached with short-termism accidental while the here and now takes the front seat, where we act as if what is here now is far important than what lies ahead of us not so long down the line.

Earlier [above] I said, “compounding effect”, what is it? and how is it relevant to personal financial planning? Well, in the world of finance, compounding is one of the key terms, this is how it works — assume that your savings are kept in the form of bank deposits with a fixed term and your return on investment is interest. In this case, for the effect of compounding interest to be applicable, the interest you earn each period should be added to your principal and then get re-invested, so that your investment balance doesn’t merely grow, but it grows at an increasing rate. This is the basis of everything from a personal savings plan to the long term growth in all kinds of investments.

This also may accounts for the effects of inflation, or the importance of paying down your debt. What it also means is that the earlier you start savings the better. Let us assume that you are now in your early 30s and have already started to save and invest, your chances of getting enough funds, not only for retirement, but also for a good life, i.e., a house to live, better school for your children, etc. are much higher relative to if you started savings when you are in your 40s — where the struggle to achieve financial freedom is far much higher.

Now, all being said – before planning, you must map out your action plan and your ultimate objective. You also need to determine if you real can make consistent savings. You need to construct your personal balance sheet/cash flow that seek to answers some important questions about your financial standing. For instance, it is advisable that only when you have paid off your short-term expensive debts and have income left over should you consider saving.

This mean, part of the plan to is for you to consider settling your outstanding high interest loans/debts. This is not a rule but a prudent advice, i.e., if you have a loan that cost you 20 percent in interest while your invested savings gives you a 10 percent return you obviously need to liquidate your invested savings and repay the loan, that’s where signs of doing well start. So, do not get into debts to make a saving investments whose return is less than the cost of debt. Look at your current financial position, i.e., your personal balance sheet/cash flow and understand where you stand, then make prudent decisions.

In any case, even if you are on your 40s or 50s, you still 20 years or 10 years before retirement, and there is still quite a lot that can be done. It is never too late to start, what is important is that you need to have a sensible saving plan, an investment strategy, then act on it and seek help from financial advisers.

Activist Investors for Sustainability of Companies

What does activism have to do with the world of capital markets? What does shareholders activism mean? Well – shareholders’ activism is the situation where individuals and institutions who would typically buy up a minority stake in a company, and whose underlying motive is to employ a variety of strategies and tactics to influence changes on how publicly held companies are governed and operated for inclusivity – i.e., to achieve their objectives shareholder activists uses media pressure, litigations, proxy voting in the AGM, etc. as tactics.

As you look around you will see that as days go-by shareholders and activists are asserting themselves towards influencing decisions of publicly held companies that it was in the past. The positive side of this is that it reinforces the need for management, with the Board’s oversight and guidance, to have inclusive engagements with shareholders and in a more proactive manner, and the result? unleash or create value without unnecessary confrontations or change in ownership and control. And what are key featured issues of interest for activist shareholders (who are also minority) but who would like their voices heard? these include: capital structure, shareholders value, management competence, board composition, major issues or decisions. Recently, environment, social and governance (ESG) issues have also been added and their profiling is becoming more visible by the day – of course these are relevant for not only enterprise and global and the sustainability of humanity.

These issues, and especially the recent trends suggests that management should pro-actively engage with investors and be prepared to defend their position and strategies aligned to common motives shared with activists’ shareholders who pursue better and conscious decisions making that cares for future sustainability of the company.

Through activism of investors and shareholders Boards are now being held more accountable in overseeing and advising management regarding efforts and risks and opportunities that investor engagement and shareholders activism present to them targeting both in the short- and long-term outcomes. For some economies, actions by activist investors/shareholders are resulting into increased proactive engagements and enhanced consciousness in decisions making on key sustainability issues. What about us?

Often, shareholders of our domestic listed companies do not appreciate the power and influence they have in companies that they have invested into. This assertion will particularly be evidenced when something has gone wrong, or when there is poor performance of the company, or where dividends are never declared, etc. In such cases, our local investors (especially retail investors) would tend to think that the regulator or the stock market has the role and power to determine these matters – unfortunately this is not entirely true.

What is true though, is that one of the core mandates for the regulator and/or the stock market is to regulate listed companies. Unfortunately, these regulatory mandates don’t so much include issues of companies’ strategy, operations, or financial performance; or ensuring dividends are declared and paid; or who should be in the Board of directors – these are matters for shareholders themselves to determine.

And yes, it is true that prior to issuance of securities (shares or bonds) to the public, the company issuing such financial instruments are required to prepare prospectuses or information memorandum that provide details of the prospective security and also provide disclosures of the relevant information that will help investors understand: the nature of the security on offer, the company behind the security on offer, its planned strategies, its financial wellbeing, its future outlook, its risks and risk mitigation, its governance and control mechanisms, etc.

It is also true that through prospectuses, the regulator and the exchange get an opportunity to interrogate the company’s leadership as to the facts stated in the prospectus, challenging their assumptions, ask for further details or seek clarification on matters that requires elaborations, require more detailed disclosures (if need be), etc. Once satisfied, the regulator and the exchange will approve the prospectus ready for capital raising and listing of securities. Then on, the regulator and the market’s mandate are that of ensuring there is compliance to continuing listing obligations i.e., timely periodical reporting of performance, holding of statutory meetings, a working governance system, etc.

So, what is the role of a shareholders? Shareholders may contribute to the success or failure of the company — why and how?

Shareholders selects the board of directors to represent their interest to the company. The board delegates this mandate to management —however the board retains the responsibility of ensuring that there is a smooth business operations and risk management mechanisms throughout the company.

By attending in the general meetings, shareholders get an opportunity to make major decisions impacting their rights, exercising their ultimate control over the company and how it is governed and managed, as well as engaging the company on any other matters of interest to them — this includes selection of the board, appointment of external auditors, approval of audited accounts, etc.

With increased cases of accounting fraud and company’s mismanagement in some parts of the world — shareholders are encouraged to approach their investment philosophy with a sense of activism, with pushy investing behavior — for better corporate governance, sustainability, and better value creation for all shareholders. Activists’ investors, in this context, are supposed to be shrewd compared to passive shareholders, and this is missing and probably what is needed in the current world of investment, especially in recent situations where “principal-agent relationship” is increasingly being challenged.

DSE and the Efforts to Engage SMEs

One of the major challenges facing our Small and Medium Enterprises (SMEs) just like the case in many economies is the access to capital finance. While this remains the case, globally, SMEs are important as they contribute substantially to GDP, employment and innovation. Over 80 percent of enterprises in the world are SMEs which account 50 percent of private employment. In developing economies, over 90 percent of all firms outside agriculture sector are SMEs or micro-enterprises that produce a considerable part of GDP. In East Africa, SME account for 60% of employment creation. Like in many other developing countries, Tanzania is not an exception, SMEs are recognized as the engine for economic growth, contributing to 35 percent of GDP; employing more than 9 million people – according to recent data by the Ministry of Industry and Trade.

There has been considerable efforts, initiative and programs by the government, government agencies, regulators, actors in the financial systems, etc. to address the challenge of access to capital. On its part, the DSE introduced the Enterprise Growth Market (EGM) segment to specifically address the challenge of access to long term capital for SMEs. There has been some form of progress since then, however at the relatively very minimal level.

There may be many reasons for the sluggish uptake and trend, just as is the case for other regional exchanges where generally the use of capital markets by SMEs remains minimal. One of those many reasons has been the dearth of skills, knowledge and experience by SMEs owners and managers on how to sustainably engage and attract long-term private capital providers, the types of venture capital funds, private equity funds, or public capital providers via IPOs, etc.  As it were, long-term capital providers seek assurance on the sustainability of business and its conduct – so considerations such as good corporate governance, separation between owners and managers of business, internal controls, audited financial statements, succession planning, etc. are at the top for long-term capital providers. And these are generally missing in most SMEs despite their best intentions and demand for long term, patient capital that is also of low-cost in nature.

It is against this backdrop that the DSE developed a special program for capacity building to executive and owners of SMEs – the program is dubbed “DSE Enterprises Acceleration Program”. This program, among others aims at enhancing capacity to the targeted enterprises in key business aspects such as strategic business planning, financial management, corporate governance, internal controls, preparation of financial statements, compliance, risk management, human resources management, etc. It also covers other aspect for enhancing skills such as mentorships and coaching.

The extension of the program is the introduction of another key Program dubbed “ENDELEZA”.

ENDELEZA is a designated non-trading segment at the Dar es Salaam Stock Exchange aimed at profiling and enhancing visibility for qualifying SMEs.

The ultimate objective is to provide qualifying SMEs with an interlink and access to potential providers of private capital from investors and financiers, i.e.: Qualified Private Investors, Angel Investors, Private Equity Funds, Venture Capital Funds, Crowdfunding Platforms Banks and other financial institutions

Upon listing on ENDELEZA, qualifying SMEs provide the necessary preliminary information about their business conduct, performance, and opportunities to which potential investors and financiers could engage them on one-to-one to access further details, carry due diligences, valuations and later decide on whether to make an investing or financing. In the future qualifying SMEs may consider accessing public capital via Initial Public Offering (“IPO”) and subsequently listing into the DSE.

So, ENDELEZA is the extension and part of DSE Enterprises Acceleration Program whose overall objective, as stated above, is to build capacities for sustainable business management and governance for SMEs owners and managers to enable implementation of their aspiring growth and development. This is to enable and empower them with skills for businesses proficient, hence become more attractive to different private capital providers and financiers.

Admission to the ENDELEZA Segment of the Acceleration Program, involves the willingness for companies to provide information about: (i) their operations for at least three (3) year; (ii) audited accounts for three (3) years; existence of an effective Board of Directors; (iv) existence of Strategic Business Plan; and (v) an indication of strong desire and ambition for growth in a sustainable manner.

Some of the benefits accruing to companies that joins ENDELEZA Project include: (i) High level of visibility across a vast investing public and financiers; (ii) Enhanced brand recognition and business opportunities; (iii) Assistance in inculcating improved corporatization, including good corporate governance; (iv) Assistance in developing access capabilities to capital markets; (v) Access to a one-stop-shop advisory opportunities on strategy and capital raising; (vi) Roadmap to higher and long-term corporate sustainability.

So far there are eight qualifying companies listed in the ENDELEZA segment – these are: Selcom Paytech Limited; Raha Beverages Company Limited (previously Banana Wine); Victoria Finance PLC, Finca Microfinance Bank; AML Finance Limited; Techno Image Limited; RENI International Company Limited; and AKM Glitters Company Limited. Many more businesses have the opportune to join this platform and benefit from it.

DSE and the Efforts to Engage Family Businesses

Family firms dominate the business landscape across economies – developing and developed. They are major contributors to both employment, availability of goods and services as well as to the economic growth, measured by gross domestic product (GDP). According to some estimates, family businesses account for over 50 percent of GDP in many markets, ranging from micro-enterprises to some of the largest listed companies. In our case, here at home – some reports indicates that 10 families-run businesses’ control a relatively substantial part of our GDP. In the process of pursuing their enterprising motives these businesses generate wealth to owners while providing the much-needed jobs, facilitating the availability of goods and services, supporting large businesses supply chain, paying taxes to the government, etc. A recent survey by the World Federation of Exchanges (WFE) supports the same.

While family businesses share many of the same qualities as those of more traditional companies (some of which are listed in stock markets), they also have unique attributes and specific characteristics that impact the way they approach management, governance, and growth of their business. In a family firm, for instance — professional life, work relations and business decisions co-exist with emotional attachment where informal bonds and personal choices are all intertwined.

Under such circumstances, the integration of family and business can be both a source of strategic advantage, especially in cases where well-run family firms outperform other businesses, but also family-run businesses can potentially be the source of inertia and governance-related challenges, where in some extreme cases may create significant socio-economic challenges to communities and societies in which they operate.

While the peculiar characteristics of family businesses are likely to influence how the family think about raising more capital i.e., via issuance of shares or bonds and listing into the exchange. However, these companies are also be influenced by economic, financial and managerial considerations that have little or nothing to do with being owned and managed by a family. Thus, one may find cases where a founder-owned and managed firm, characterized by a strong paternalistic outlook and distrust of outsiders, would be reluctant to list on a stock exchange — we face this challenge in our society today.

Since the DSE established the alternative window for capital raising by Small and Medium Enterprises (SMEs) — Enterprise Growth Market— there has not been any of the family-owned businesses that have used the platform to raise capital and list. We, however, remain patiently optimistic that probably future generations would consider going public, i.e., for sustainability and growth of their companies.

Now, given the prevalence of family firms across markets and the importance of their economic contribution there is value, particularly for stock markets and the supporting eco-system (stockbrokers, financial/investment transactions advisers, nominated advisers, regulators, etc) to understand the impact of ‘family-ness’ on the public capital raising and listing decisions and therefore engage in identifying possible mechanisms to enhance the attractiveness of equity and debt markets for these firms.

For example, it is important to understand that family firms are a discrete category of businesses with specific characteristics that impact the way they take decisions, perceive their activity and relate to stakeholders. We need to live with the reality that for the family owners/managers the company is not simply an investment, but also a source of income and professional realization for the current and future family generations. We need to appreciate the fact that family owners/managers extract a significant amount of non-financial benefits from owning and administering a family firm, benefits such as the pleasure of owning and controlling a company that has their own name, or the benefit of influencing public opinion through their businesses, etc. Because of these, family owners/managers place a premium on maintaining control over the company and having family members involved with the firm.

That way there is clear need to strike a balance between meeting family related business uniqueness while encouraging these businesses to pursue the attractiveness of accessing public capital and listing, for efficiency and sustainability of their businesses. 

That’s why the DSE, learning from the EGM segment, have established two programs, one of which (DSE Enterprises Acceleration Program) aim at building capacity to owners-managers on diverse mechanisms of operating businesses sustainably while creating opportunities and potentials to attract the less costly, patient, and efficient capital which is also long term in nature. The other program (DSE SMEs Acceleration Segment – “ENDELEZA”) aims at enhancing governance, profiling, and visibility of privately-held businesses with needs for patient capital (from private equity, venture capital funds, angel investors and development finance institutions). The “ENDELEZA” program provides a linkage platform between those with need for long-term capital needs and potential suppliers of such capital.  In future, companies in this program may consider accessing public capital via Initial Public Offering (IPO). For details on these program – one may kindly visit the DSE website.   

Infrastructure bonds for infrastructure development

The infrastructure gap challenges remain significant daunting; however, there has been commendable progress over the years in bridging the gap, this has been due to prioritization and focus. Indeed, prioritization resulted into enhanced financial resources allocations and the efficient and optimally to which resources have been utilized. However, financing remains a key constraint; and there seem to be no single solution into our infrastructure financing gap. Thus, one of the most effective approach in addressing the existing infrastructure financing gap lies in creating a series of initiatives which help to catalyze a response from a broad spectrum of players in the financial markets.

As we know it, infrastructure projects are high-cost investments; however, they are vital to a country’s economic development and prosperity. Infrastructure projects cuts across the entire economy and is a key enabler of all other initiatives such as industry, trade, agriculture, etc. We also know that infrastructure development has a ripple effect in employment creation, the domestic business environment, increasing our national competitiveness, attracting foreign capital and investments, etc., and it therefore has a direct impact on the nation’s GDP growth. The interdependence and synergetic relationships between ports, roads, air travel and railway infrastructures, if well planned and executed, can be a significant factor in trade competitiveness, jobs creation and economic growth.

We largely agree that building a 21st century infrastructure is a critical component of the country’s efforts to accelerate our socio-economic growth, expand opportunity, create jobs and improve competitiveness of our economy. We also agree that investment in infrastructure is vital for sustainability of our economic growth.  We further agree that infrastructure financing gap cannot be tackled by the public or private sectors in isolation. What is needed is an effective collaboration of the public and private markets. As we stand, energy, transport, water, information technology, etc. remain well below expectations, and this creates bottlenecks as we try to achieve the transformational growth.  The need is particularly stark in the light of rising populations, and rapid urbanization. 

It is therefore necessary for all of us to work jointly in finding many more options of financing the increased investment in ports, airports, roads, bridges, communication networks, water and sewer systems as well as other projects by facilitating partnerships between the government and private sector investors.

Traditional approaches of financing infrastructure need to be supplemented by other alternatives i.e., issuance of savings bonds or the use of special vehicles such as financial instruments like infrastructure bonds, green bonds, social impact bonds, etc. Such options will make infrastructure financing more accessible to a wider range of institutions and individuals, provide more flexibility for the government, and offer more opportunities for the private sector to take an active role in financing public infrastructure assets. The good news is that the CCM Election Manifesto, our FYDP III, the Financial Sector Development Masterplan and the 2021/22 Budget Speech by the Minister of Finance all points to the direction towards the need for the financial system and markets actors becoming innovative to address the pointed challenges in mobilizing new sources of funding our infrastructure development.  As is, our capital markets segment of the financial sector has been hampered by the lack of liquidity, vibrancy and long-term investment instruments. 

Given the nature of infrastructure projects that normally require large-scale and long-term financing, attention could be paid to the “infrastructure development bonds”.  Infrastructure bonds can be a more efficient form of financing as they reflect the long-term nature of infrastructure financing, which is often not available from the banking system. They also bring more transparency to the transaction, and the financial markets. 

What are infrastructure bonds? – these are financial instruments issued either by governments, government authorities and agencies or by private entities for the purpose of raising funds for financing specific infrastructure projects. The Government may issue infrastructure bonds, as part of its issuance program, but in this case – proceed are ring-fenced to finance specific identified projects.

Infrastructure Development Bonds need meet the following conditions: (i) they are issued to raise capital for specific stand-alone projects; (ii) they are repaid from cash generated by the project; (iii) they assume, and their performance is subject to, certain project specific risk; and (iv) for liquidity purpose – they are listed in the stock market.

Infrastructure Bonds are designed to let the wider society take a more active role in financing public infrastructure assets via attracting new types of investors into the infrastructure market, particularly banks, pension funds, insurance companies, and private individuals. There are many other benefits for using this approach in financing our infrastructure: i.e., deepening the local debt capital markets, broadening the base of potential investors and financiers of our infrastructure, increased transparency and accountability, reduction in the cost of funding, etc.

Stock Exchanges and Sustainable Financing

There may be reasons why organizations in the current financial system struggle to support a sustainable economy (as identified in the UN Sustainable Development Goals), as well as the opportunities for that to change, i.e., despite the pressures and trends which arise in our volatile, uncertain, complex and ambiguous world, and how these affect the financial system. Unfortunately, the current financial capital flows and the incentives that drive them are largely not supportive of the ESG/sustainability trends. However, in the mix, stock markets (being key infrastructure/institutions within the financial markets) and their stakeholders are expected to thorough consider some of these questions: how/where do we see sustainability fit within the financial system? what role do we play in the system to ensure sustainability is embedded in the future of financing? do we recognize the barriers that are being presented to us as ways in which the financial system does not currently work for sustainability? and, do we recognize some of the opportunities for that to change?

With this thinking, stock exchanges are required to step up and engage their key stakeholders (i.e., regulators, investors, issuers, standard setters, stockbrokers, etc) about their role in creating better communities and ensuring there are tools and mechanisms to address sustainability/ESG (environment, social and governance) issues. In evaluating the 17 UN-Sustainable Development Goals (SDGs), one could clearly identify at least four (4) goals relevant to stock exchanges, where exchanges are best positioned to support implementation of these goals. These are goals number 5 – Gender Equality; Goals 12 – Sustainability Information; Goals 13 – Climate Change; and Goal 17 – Global Partnerships.

And so, to start contributing towards implementing these SDGs, exchanges could:

In mid-2016 the DSE made a conscious decision to join the UN-SSE Initiative. For the past five years DSE has focused on engaging its members advocating for more awareness and the appreciation of their potential role in creating sustainable communities within their business practices and mandates. These engagements have been to extent of capacity building, as well as enhancing adherence on continuous listing and membership obligations – especially in the aspect of transparency and good governance.

The other initiative has been the DSE Members Award, an annual event involving collection of data and information from DSE members on their practices and conscious undertakings on matters related to global temperature rise, resources depletion, waste pollution and deforestation; on issues of human rights, employment parity, child labour, and workplace safety; and/or bribery and corruption, board diversity and structure, tax strategy and business.

Why does this matter? the interest in sustainable finance an investment is a catalyst for change and some listed companies, especially subsidiaries of multinational entities have made some progress in the area of ESG practices and disclosures; some of them are voluntarily preparing sustainability reports covering not the financial part of their annual reports, but the work they are doing on environmental protection, good work environment, gender parity, good corporate citizenship and governance. As we move towards integrating sustainability reporting as part of continuous listing obligation rules, we are seeing some good progress already.

DSE, being a partner exchange to the UN-SSE Initiative, among others, is expected to promote sustainability thinking, strategies and practices as well as to consider ESG factors more explicitly in its members’ disclosures/reporting, in line with international best sustainability reporting frameworks — either by the Task Force on Climate-Related Financial Disclosures (TCFD) or the Global Reporting Initiative (GRI).

Our purpose real is trying to get the market to think more holistically about the relevance of sustainability in the future of financing and investment – we see mega-trends that points towards this direction. Thus practices, disclosure, and reporting on ESG/Sustainability issues could be seen as an opportunity, rather than a negative challenge or hindrance. In recognition of the sustainability opportunity, and related risks, the DSE has been actively engaging its members to integrate sustainability into their mainstream practices. DSE has upended into disclosure requirements and has revising its Rules (DSE Rules 2020) to require mandatory reporting of ESG activities by listed members, guided by basic reporting standards/framework. DSE considers itself uniquely positioned at the intersection between investors, companies, regulators, and the government to primarily drive ESG disclosures in the market where ESG/sustainability is not as pronounced or required. As such the DSE play a key role in promoting responsible investing and sustainable development.

Some of the neighbor exchanges, have already included sustainability/ESG reporting in their listing (membership) and continuous listing (membership) obligations rules. Stock exchanges in South Africa, Egypt, Morocco have achieved this already; other exchanges have creating rules for listing green bonds – South Africa, Egypt, Mauritius, and Kenya stock exchanges have green and impact labelled products i.e., green bonds, while others such as Nigeria have created Responsible Investment Indices – aiming at sharpening the awareness of responsible investing.