Keith Collister, Contributor
COLLISTER
MANY JAMAICAN investors, especially those who are relatively new to the stock market, have recently been asking the question "What is happening with the Jamaican stock market?" At the beginning of this year, coming off last year's spectacular stock market performance, many of Jamaica's leading financial analysts appeared to be very bullish.
The best example of this bullishness was John Jackson's seminar held at the beginning of the year. At that seminar, leading local financial analyst John Jackson projected a rise of 50 per cent in the Jamaica All Share Index for this calendar year - he has now extended the time frame to achieve this increase to the end of the fiscal year.
At the same seminar, in response to the same question, one of Jamaica's leading fund managers, Rezworth Burcheson of Pan Caribbean, projected a more conservative 25 per cent rise in the All Share Index for this calendar year.
As of last Wednesday, both main local stock market indexes were approximately flat for the year, after having hit a year low last week on June 9, according to Mayberry's top stock analyst Kiesa Ansine.
GOOD RULE
The peak for the year of the main JSE index was on April 26, when it barely exceeded its January high. Interestingly, the old stock market adage "sell in May and go away" appears to have been a good rule both this year and last.
To understand this year's relatively poor stock market performance so far, we need to remember that last year was the best stock performance in Jamaica for over a decade.
If we use the more representative index of Jamaican stocks, the Jamaica All Share, the stock market was up around 107 per cent for the year, putting it in the company of less than half a dozen emerging stock markets worldwide that doubled last year, including those of the Ukraine, Egypt and Colombia.
In 2004, a combination of factors came together to produce that year's spectacular performance. The most important was the return of local investor confidence, as part of an improving macroeconomic environment.
For the first half of 2004, whenever interest rates were cut, our local stock market responded almost immediately as investor's excess liquidity was invested in stocks, driving up trading volumes and prices, rather than in buying foreign exchange as a hedge as had been the case during a large part of 2003.
POSITIVE FUNDAMENTALS
The return of macroeconomic stability, as part of an emerging consensus on economic policy, and good prospects for foreign direct investments also created very positive fundamentals for stocks. These improving economic fundamentals, good corporate earnings and the substantial foreign investment in our market, the so-called 'Trinidad effect', combined to create a huge 'recovery rally' as confidence returned.
After such a good year, many experienced investors both locally and internationally believe that stock markets typically 'revert to the mean'.
The so-called 'smart money' of experienced local investors currently appears to believe that even after the recent sharp correction in May, most stocks are fairly priced at what are high price earnings ratios by historical standards, and that there are few compelling buying opportunities.
Some of these investors also appear to believe that it is time to switch from financial sector stocks, which have lead the stock market rally to date, to 'real sector' companies, as falling interest rates are likely to negatively affect those companies which are highly dependent on income from government securities for their earnings growth.
They believe that the financial stocks to invest in are those financial sector companies who are more diversified in terms of their business, particularly those who have been successful in replacing falling interest income from Government securities with higher margin loans.
INITIAL PUBLIC OFFERINGS
They appear to subscribe to the view that the main opportunities lie in Initial Public Offerings (IPOs) such as the very successful recent listing by Mayberry, which cash rich institutions hungry for portfolio diversification will be forced to buy.
They are consequently waiting for other similar opportunities such as Surpreme Ventures highly anticipated private placement (which is likely to be subsequently listed on the Jamaica Stock Exchange), and First Global's IPO expected in November.
It is also likely that the wipe out suffered by investors in Dyoll, as well as the concerns over the imposition of a capital gains tax had what should turn out to be a relatively transitory affect on our local stock market,
In the latter case, the Minister of Finance was wise not to impose a capital gains tax as it would probably have collapsed the stock market, which would not have earned him any tax revenue and could have endangered our still precarious recent macroeconomic stability.
I would argue however that the main reason for the recent weakness is that last year the stock market got ahead of itself, as price earnings ratios expanded massively across the board. Essentially, the market moved from being valued on the basis of historical earnings to an optimistic projection of forward earnings. In many cases, these earnings projections were actually over optimistic as earnings growth has slowed for many companies this year, so that the market now needs time for earnings to catch up with prices. In addition, there is anecdotal evidence that the continued extremely poor crime situation, particularly some recent highly publicised murders, have started to affect investor confidence again, particularly amongst our geographically mobile middle class.
Interestingly, there seems to be a very similar phenomenon going on in the Trinidad stock market, which until very recently had been remarkable for the reliability with which it had continued to rise. It has also recently corrected, apparently also on the view that stocks had got ahead of themselves, and concerns over crime (the recent political turmoil is unlikely to have helped). Trinidad's extremely strong fundamentals should soon reassert themselves however, and the trend for the increasing integration of the Jamaican and Trinidad stock markets is likely to continue, so that our market at some point is likely to be again be supported by Trinidad's excess liquidity as in 2004.
In summary, whilst I continue to believe that Jamaica's stock market performance is likely to be only mildly positive this year, IPO's should handily outperform the overall market. The stockmarket has not responded to continued declines in our domestic interest rates mainly due to the view that it had got ahead of itself amongst the "smart money", with a consequent shift in investor interest into real estate. At some point however, we should see a further mild rally in our local stock market this year, assuming the current anticipated interest rate cuts continue, as the major institutional investors are forced out of cash into stocks.
