Macroeconomic Variables and Shares Performance

There are several factors that influence the share price performance and the level of return (capital gain) for investors in listed shares. Key factors are: (1) demand and supply factors; (2) economic variables i.e. GDP, inflation, interest rates and exchange rate; (3) company news (also called corporate actions); and (4) psychological or market cycle-related factors. In today’s article, we will focus on the economic variables, read on:
A company’s value, return and share price reflects the perception of its earnings and profit flow. If the stock market (or exchange) detects something about a company that may harm its earnings flow, the company’s share price falls. If the stock exchange hears good news about the company — it current earnings, new innovations or discoveries that have future earnings growth potential, leadership enhancement, etc — its share price rises.
Share prices change because sellers and buyers are constantly reviewing companies’ news and especially its earnings prospects. Therefore, in this context, one may claim, there are two factors that determine a change in share prices – future expectations of earnings and the price to earnings multiples, as we have learnt in a previous articles. Both of these factors depend on an evaluation from buyers and sellers as they learn more about, and understand the listed companies.
Apart from fundamental company performance-related factors, investors are also looking at other market information, including economic news (such as economic growth, inflation, changes in exchange rates, change in interest rates, etc) and also political events that can cause share prices to rise or fall. In the short term, the share price is also affected by intangible factors such as hype and word-of-mouth.
Share prices performance on companies listed in the Dar es Salaam Stock Exchange PLC (DSE), like other stock markets, are also influenced by the happenings of other markets and economies (though it may not be as direct for the case of the DSE). If there is a substantial fall in other major markets prices and indices, Tanzanian share prices are likely to be under pressure as well, mainly because of foreign investors participation in our market. Foreign strategic investors owns a large part of companies listed in our stock market, and foreign portfolio investors commands almost two-third of our periodical trading activities.
The stock market activities and performance largely depend on the state of the economy and its economic activities. Economic conditions directly affect companies’ earnings and earnings prospects. Therefore, economic news is as an important influence on the share market activities and performance. Economic statistics that affect the share market are:
Official interest rate, dictated by the financial markets and the Central Bank
Inflation rate or the rate of increase in consumer prices
Rate of growth of Gross Domestic product (GDP)
Exchange rate, or how the Shilling fares against other currencies
The health of other key economies
Interest rates and inflation
Interest rates affect companies’ earnings directly because their debt repayment costs rise and fall with the interest rate changes.
Interest rates determine how much it costs you to borrow or what you can receive if you invest your money. A rise in interest rates increases the attractiveness of fixed interest investments (such as bonds) relative to shares. High interest rates also increase a company’s cost of borrowing, it means taking money directly from profit to pay the company’s bankers. Rising interest rates also affect the level of economic activity and consumer spending.
Alterations to interest rates are part of monetary policy, a weapon that the Central Bank wields from time to time in relation to economic activity. Like any central bank, the Bank of Tanzania lifts interest rates to choke off any stirring of inflation, as a result of bubbling economic activity.
During a period of tight liquidity, interest rates rise, increasing production costs. Conversely, interest rates fall when there is ample liquidity. People have more purchasing power, which is positive for business expansion and share investment. During these times, interest rates are used as tools for mopping up excessive liquidity.
Inflation simply refers to how much the prices of the goods and services that you buy go up by each year. It is usually written as a percentage. One of the reasons that people invest in the share market is to try and beat inflation.
The stock market dislikes inflation: inflation pushes up costs for companies quicker than it can pass them on to customers, adversely affecting earnings. Conversely, when a central bank believes that economic growth needs to be stimulated or an economic decline reversed, it will cut interest rates.
Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples, and high inflation drives low multiples). Deflation, on the other hand, is generally bad for shares because it signifies a loss in pricing power for companies.
The exchange rate
Also, a company that exports or imports products or services, or has receipts or payments in other currencies, is affected by the exchange rate between the Tanzanian shilling and foreign currencies. The most important of these currency crosses is the rate of the Tanzania Shilling to the US Dollar. A high Shilling in relation to the USD, can be good for certain sectors of the economy, making both our exports and local import-replacement industries more competitive. It’s particularly good for local producers and businesses who sell their products in USD, but take their profits and report their earnings in Shillings.
Apart from an indirect impact of foreign exchange to investors in securities (shares and bonds) that are listed in the stock market — investors, especially foreign investors, in often cases are also directly affected by the movement in the exchange rate. The fall of the Shilling against the United States dollar in recent days, as an example, have had negative impact in our market valuation and indices performance but also in our trading activities. Fortunate for us, if this this is the right term, most countries were and are being affecting in a similar manner.
Gross Domestic Product (GDP) is the value of all goods and services produced in the economy. When GDP decreases, the economy contracts and companies’ earnings fall and when GDP increases, the economy expands and companies’ earnings rises. Therefore, any prospects of positive economic (GDP) outlook will attract investors in the shares of companies operating in such an economy — but the opposite is also true, prospects of negative outlook in the economic activities will reduce investments in shares listed in such an economy.
The health of the key economies
Foreign investors (both strategic and portfolio investors) accounts for about two-third of the DSE’s listed companies share ownership and trading activities. Therefore most important economic news affecting the stock market is in some cases that concerning the health of other key economies. The recent case of reduced commodity demand in China and therefore negative prospects for exports in African countries, and how this has affects indices and returns for listed securities, is the case in hand.
In the short term, when bad economic news causes a fall in these stock market, the DSE as is in other stock markets comes under pressure the following day even if these are other markets economic data, not Tanzanian market data. This is because of, among other factors, economies and economic inter-relatedness following globalisation and economic liberalisation.

Dividend Payments, or Not — why does it matter?

This particular quarter, is that period of the year where investors expects dividends announcements from the companies that have invested following these companies’ performance for the past year. I therefore thought I should say something about dividends, their different aspects and why should one care about dividends — as it tells a story about future business growth or not.
When investors (individuals and/or institutions) invests in a company listed in the stock market — they, in normal cases, among others expect two types of direct financial benefits: (i) a share of the profits made by the company is a particular period of time and (ii) the increase in value of their invested money (also called capital gain).
When a company earns profits out of its activities or operations during a particular period of time — it has several options on what it can do with such profit; it can either re-invest that profit in the business (called retained earnings), or it can distribute all or part of that profit to its shareholders, or in some cases companies uses profits made during a particular period to pay for its debts, or buy back its shares. A dividend therefore is a distribution or payment of profits made by a company to its shareholders.
Distribution of profits to the company’s shareholders can be in way of cash (usually a deposit into a bank account, or through dividend checks with the post office) or its can be in non-cash, also called bonus shares.
Whether in cash or non-cash, dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholders. Public companies (i.e. companies listed in the stock market) usually pay dividends on a fixed schedule.
Important dividend dates
There are three important dates relating to dividends:
1. Date of declaration – this is the date on which the dividend is declared by the company.
2. Date of record – Only shareholders registered on this date will receive the dividends. As an investor, you may sell the shares after this date and still receive the dividends.
3. Date of payment – This is the date of payment of the dividend. Dividends are only paid to shareholders registered on the date of record.2
These dates are very important for an investor as they assist in determining when to buy and when to sale your shares, these dates tells you as an investor on whether you will have (cum div) or you will not have (ex div) the rights to receive dividends declared by the company if you bought or sold shares in between dividend dates.
Dividend Yield
The dividend yield is the percentage of net income to be paid out as cash dividends to shareholders relative to the current value or price of shares. It can also be expressed as a company’s total annual dividend payments divided by its market capitalisation, assuming the number of shares is constant. It is often expressed as a percentage. Dividend yield is used to calculate the earning on investment (shares) considering only the returns in the form of total dividends declared by the company during the year.
The company determines the dividend yield based upon its preferences, which are either to distribute income as cash dividends or re-invest the income back into the company to generate further income.
As a shareholder who has purchased shares in a company, the dividend yield may be very important to you when considering purchasing a share. A high yield means you will receive a high income from the share. However, a high dividend yield may not necessarily mean that your share value is maximized because companies that retain their earnings and pay low or no dividends may use those retained earnings to expand and build the company and thus grow your investment, which means you have a capital gain.
Obviously the ideal situation is to own a share that gives you both income (dividend) and a good capital growth.
So, let us restate the important concept of a dividend yield. It is calculated by taking the amount of dividends paid per share over the course of a certain period of time and dividing by that share’s price. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don’t have a dividend yield at all because they don’t pay out dividends.
As an example, let us assume Company ABC that pays an annual dividend of Tshs. 200 and its current price as quoted form the stock market at Tshs. 2,000 per share. In the same vein, let us assume Company XYZ pays an annual dividend of Tshs. 200 and its shares currently trades at Tshs. 1,000 per share. By calculating the dividend yield, the investor can compare the amount he would earn in cash income annually from each share.
Company ABC dividend yield calculation: Tshs. 200/Tshs. 2,000 = 10 percent
Company XYZ dividend yield calculation: Tshs. 200/Tshs. 1,000 = 20 percent
In other words, despite the fact that Company ABC pays a higher per-share dividend, Tshs. 100,000 invested in its share would yield only result into Tshs. 10,000 in annual income as opposed to the same amount invested in company XYZ which would yield Tshs. 20,000. An investor interested in dividend income and not capital gains should opt for the latter, all else being equal.
Because the share price is in the denominator, the dividend yield falls as the share price rises, assuming all things remain equal. The lower the dividend yield, the more expensive the share and vice versa. An increasing yield may look attractive, but in some cases it may be a cause for concern because the share price is falling. When a company has a high yield, look at its dividend cover. If the dividend yield is unsustainable, the dividend cover will be low. If the yield is rising, investors have to ask why the price is falling. A rising dividend yield could mean the market’s adjusting the share price down because it believes the company can’t maintain its dividend.
Note: Dividend Cover = Earnings (Profit) per share/Dividend per share
The dividend cover tells management how many times bigger the earnings of the company are in comparison to the dividends paid per share. The bigger the number the better and the more healthy the company.
Dividend payout
The dividend payout is the dividend that a company chooses to pay to its shareholders instead of retaining the profits in the company.
In the days of falling share prices, in often cases boards of directors will recommend dividends, whose intent is to help stabilize the company’s share. However, it is important to note that dividends, in and of themselves, do not necessarily make the company a better investment.
Companies that earn high returns on equity, have little or no debt, and large room to expand in their current industry would best serve their shareholders by paying no dividends. Instead, they should opt to reinvest all of the company’s available resources into growing the value of the underlying business. The shareholders will be rewarded through appreciation in the share price and, probably, better dividends in the future.
In other words, a company should only pay dividends if it is unable to reinvest its cash at a higher rate than the shareholders (owners) of the business would be able to if the money was in their hands. For example, if an investor in company XYZ was earning 25 percent on equity with no debt, management should retain all of the earnings because the average investor probably won’t find another company or investment that is yielding that kind of return.
Dividend payout ratio
The dividend payout ratio is defined as the percentage of net income that is paid out in the form of dividends. This ratio is important in projecting the growth of a company because its inverse, the retention ratio (the amount not paid out to shareholders in the form of dividends), can help project a company’s future growth.
The payout ratio varies according to the stage of life of a company. When a company is young, earnings are retained and ploughed back into the business, so the payout ratio is small.
The payout ratio is the reciprocal of the dividend cover. A suitable payout ratio depends on a company’s cash needs and investor expectations — sometimes a difficult act to balance.

Benefits of a Stock Exchange to the Society

Stock exchanges (also called stock markets) are places that provides facilities and a regulatory environment that enables governments, industries and businesses to raise long term capital and investors can buy and sell various types of financial instruments (i.e. shares, bonds, etc).

Stock exchanges grow (as it has been all through history) in response to the demand for funds to finance investments, development projects and business ventures. From early days, capital markets were pre-eminent, raising funds for investments and loans for governments and businesses, and developing thriving secondary markets in which investors could sell their financial instruments to other investors.

Much early industrialisation was financed by individuals and partnerships — through their savings, but as business required more expansion and capital requirements became larger, it was clear that companies’ formation were necessary, where numerous number of people could jointly finance enterprises for an exchange to owning a piece of that company by way of owning shares of the company and a promise (an agreement) of profit sharing among shareholders. Under such arrangements— manufacturing enterprises, mining, brewing, insurance, railways, ports construction enterprises were financed by way of issuing shares or bonds which would then trade in stock markets. This was, and has been, the case in Europe, America and in recent days, Asia.

As for us in Africa, especially in the Sub-Saharan, excluding South Africa and Kenya — this phenomenon has been introduced in even more recent times — two or three decades ago, in response to requirements for economic liberalisation and therefore the need to accelerate the wave of privatisation of state-owned-entities. Under this system and structure, it was envisaged that stock markets will be the forefront of tool of, not only privatisation but, economic progress. Just like it was in Moscow, Warsaw, Sofia, etc — we were to replace our strong opposition to capitalism with stock markets that were to facilitate privatisation and to be a platform for capital raising by the private sector, as the engine of economic growth.

Apart from the examples of Russia, Poland, and Bulgaria mentioned above — even countries which still espouses communism, such as China and Vietnam, now have thriving and increasingly influential stock exchanges designed to facilitate the mobilisation of capital and its employment in productive endeavour of their economies. In the case of China, it has two thriving stock exchanges ; in Shanghai and Shenzhen, with over 2,500 companies listed. The Shanghai Stock Exchange is the undisputed large China equity market which is vitalised by a steady stream of initial public offerings (IPOs) from the country’s biggest and best state-owned-entities; so it has been a popular tool for privatisation in China. There is also the Shenzhen Stock Exchange, which mainly provides a platform for capital raising and listing of small and medium-sized companies owned by private entrepreneurs. There are now tens of millions of Chinese investors who puts their savings in the stock market on the expectations of rewards on their capital.

There are now over 100 countries with exchanges and some of these countries have more than one stock exchange. Africa has 25 stock exchanges.

What is a well-run stock exchange? what are its characteristics? and what are the main benefits of such an exchange?

A well-run stock exchange is the one that is fair — i.e. a market where it is not possible for investors and capital raising enterprises to benefit at the expense of other participants — all players should be on the level playing field. A well-run stock market is a market which is well regulated so as to avoid abuses, negligence and fraud in order to reassure investors who put their savings at risk. It is also one in which it is reasonably less costly and efficient to carry out transactions. In addition large number of buyers and sellers are likely to be needed for the efficiency price setting of listed securities and to provide sufficient liquidity, allowing the investors to liquidate their investment at any time without significantly changing the market price.
How can a country/society achieve such a market — by proactive policies towards this direction, a well articulated regulatory framework and when many within the society participate in the stock market, as investors or businesses with the need to raise a well-priced capital for their growth and expansion. And how do you motivate many people within the society to participate in the stock market? — through public awareness and education as to the role and benefits of the a stock markets to them as individuals, and the society at large. So, what are the benefits of a stock exchange?
(i) it facilitates funding growth and expansion of businesses; (ii) the stock markets facilitates allocation of capital within the economy — through the powers of market forces, an efficiently functioning stock market is able to assist the country in deciding what will be produced and which firms will produce it. By way of accessing the capital that can rarely be mis-priced, funds (or scarce resources within the economy) will be allocated to projects and enterprises that maximises the economic well-being of a society; (iii) shareholders of a company listed in the stock market benefits from the availability of a speedy and less costly secondary market if they want to sell their shares, bonds or such other financial instruments — in addition shareholders have access to information about the value of their wealth holdings; (iv) a public profile of a company is enhanced by the company being listed in the stock exchange; banks, government and regulatory entities, suppliers, as well as the public have more confidence in listed companies and are therefore more likely to be funded by banks at a relatively lower cost and can be trusted as it attracts more confidence from the society; and (v) it encourages good corporate governance behaviours — directors of listed companies are encouraged to behave in a manner conducive to shareholders’ interest; this is achieved through a number of pressure points i.e. the need for transparency, continuous listing obligation, the need for periodical reporting, etc.

So, what exact tasks that does stock markets perform so as to ensure the above benefits accrue to its listed companies and their investors? (i) the stock market supervises trading activities to ensure there is fairness and efficiency; (ii) it authorises market participants (such as brokers, dealers, custodian banks, etc) to become its members; (iii) it creates a regulatory environment in which prices of listed securities are formed without distortions; (iv) stock exchanges organises for the settlement and delivery of transaction; (v) it regulates admission of companies to the exchange and its continuous listing obligations; and (vi) it disseminates information to various stakeholders (investors, government agencies, regulatory authorities, news media, etc) for understanding and for decision making.

In conclusion — stock markets continues to gain relevance in the current economic set-ups, both domestically and globally. Therefore, the more the society embraces this fact the better it is for its economic progress, especially as a resource mobilisation tool for the country to finance its own economic progress. As it is we are not yet there — our market capitalisation to Gross Domestic Product (GDP) is about 30 percent (if we exclude cross-listed companies, this level is a mere 10 percent); we have only 23 listed companies (only 7 companies have been listed as a result of privatisation of state-owned-entities, out of more than 300 privatised entities) and our investor base is 450,000 out of more than 45 million people. More public awareness and education on the role of stock exchange needs to be pursued.

Stock Markets and the growth opportunity

When many within our society hear and think of stock market (and probably capital markets), one of the things that may easily come to mind is that it virtually exist. Our market capitalisation is small relative to the size of the economy — Gross Domestic Product (GDP), our liquidity (though has significantly increased in recent days) is relatively low, the number of listed companies relatively to the number of companies operating within our economy is too low and the number of people with investment accounts at the Stock Exchange relative to our population is also too low.

With a total market capitalisation of TZS 21 trillion (TZS 8.5 trillion out of which being domestic market capitalisation) relative to the GDP of about TZS 80 trillion — market capitalisation to GDP ratio is less than 30 percent; with only 23 listed companies and about 450,000 investors out of more than 45 million population, these statistics says, as a society we need to do more in this important aspect of an open market economic structure. What does these data tell us?

In practice it means, as a country, we are sitting in a gold mine that could potentially unlock a substantial portion of highly needed capital to build infrastructure system in the transport, agriculture, education and health sectors. The stock market can be a platform that could inject much needed capital into our country’s growth engine — Small and Medium Enterprises (SME) and also the much needed tool to facilitate exits by venture capital and private equity funds and thus encourage even greater investment in our enterprises. Crucially, however, is the fact with our current direction where domestic financial resources mobilisation seems to take a significant consideration in our political and economic discussions, then the stock market could be one of the focal vehicles which can enable local citizens to play a more active role in financing our own economic development by way of releasing some of their idle savings in financing bankable enterprises and development projects.

The key question, however, is, how can we get there? how do we bring this awareness so that as we craft policies, laws and regulations — this aspect is afforded the attention and resources that it deserves? To be able to respond to these questions, one would need to ask some more questions? why do we not have many companies listed in our stock market, given its more than 15 years since its establishment? why do our market remain relatively illiquid? — I will try to respond.

Listing of securities on an exchange, either equity or debt (bonds), is a process, which is neither easy or to be underestimated. It is sometimes much easier (although generally more expensive) to go a bank albeit banks normally provide short to medium term working capital compared to long term capital provided by the stock market. The nature of a public listing, much as it is not a bilateral arrangement, it requires greater amount of accountability and transparency, as a result the process requires recruiting a team of advisers (including investment advisers, accountants and lawyers) to prepare the offering document that will then be vetted by the capital markets regulator and the stock market before being made available for public consumption in their investment decisions. This administrative requirements and financial discipline is what the market (and investors) demands in exchange for the efficiently and more favourably priced capital. Unfortunately, given our culture, in most cases, what the markets (and investors) wants —i.e. transparency and accountability — is sometimes not the same as what some business owners and managers want, especially for family owned businesses.

Because, it is understandably challenging for businesses to exchange their business freedom and secrecy in exchange for capital, in order to encourage such businesses to use stock market to raise capital, there are several fiscal incentives provided by the Government to incentive businesses to participate in the capital markets. Such incentives are: reduced corporation tax from 30 percent to 25 precent, tax deductibility of all Initial Public Offering (IPO) costs for the purpose of income tax determination and withholding tax on investment income made by Collective Investment Schemes (CIS) is final i.e. investors in CIS are not charged with tax on the income distributed by CIS after the scheme’s income taxation. Surprisingly, these incentive have not been able to encourage companies to participate in the capital market for capital raising and list as had been anticipated.

As a market, we do understand that incentives are crucial to deepening the market as we help drive behavioural change and build the momentum for capital raising and listing in our society. We also do understand that while some companies acknowledge that there are many benefits of listing into the public exchange i.e. raising of efficiently priced long term capital, increased company profile and image via greater publicity, attraction of good talent and hence efficiency, etc — however, when these are examined versus resources deployed in the listing process as well as post-listing obligations, to some the proposal to list becomes less attractive unless accompanied by tax (and in some cases non-tax) incentives. And hence, the existence of incentives in our market. As to what more can be done beyond what is currently provided in order to attract more corporate entities to list, is a question for further study.

The other factor that entrepreneurs and business owners/managers consider as they contemplate to bring their enterprises into the stock market is the valuation aspect. When I joined the Exchange in mid-2013, valuations for various companies that are listed in the exchange were somehow depressed mainly due to lack of liquidity. Our listed commercial banks, cement companies, the alcohol beverages manufacturer, gas producer and distributor as well as the cigarettes and logistics companies — their valuation relative to comparators in the region were understandably on the lower side. As a result, there were some arguments that the market, in such a situation, was not attractive either as an exit route or for cashing-out purposes. Since then, the liquidity in our market has significantly improved (from an annual average turnover of Tshs. 50 billion to the current situation where an annual turnover is above Tshs. 750 billion), following the improvement in liquidity, valuations have also improved — our current market Price Earnings ratio is about 16 times compared to less than 10 times three years ago; we are now in good comparison to other companies, sectors and markets in the continent. In my opinion, our current valuations are attractive enough for capital raising and listing.

As I encourage business to consider current valuation as relatively fit, I also understand that we need to do more to motivate more liquidity in the market. As it is, liquidity is normally a complex issue in many markets, which in most cases do not have a simple solution. However, one obvious impediment to creating liquidity is the “buy and hold” strategy employed by many investors — retail and institutions. This strategy sucks out liquidity. For retail investors the solution is more on the public awareness and education, which we will continue to pursue. As for institutions, such as those with long-term liabilities that have to be matched with long-term asset base, such as pension funds, life insurance companies and unit trusts — the solution is somehow complex as it requires a right balance between building a portfolio based on investment policies and mandates versus holding a trading book for trading income. In addition, given our smaller size of institution investor base, the offloading of a sizeable position can sometimes be not as quick or as efficiently priced.

In conclusion — the growth of our stock market represent an opportunity which has the potential to accelerate development and promote financial inclusion as well as local citizen’s economic empowerment. However, stock markets do not grow on their own — clear policies, strategies and action by both the government and private sector should supplement the mere existence of a stock market and its legal framework.