Vantage Point with Keith Collister
After nearly two years of suffering through a brutal bear market, the average Jamaican investor could be forgiven for thinking that the stock market was not for them.
However, if our bear market has bottomed, it would be a mistake not to buy now when stock prices are depressed.
Using the Jamaican All Share Index, as opposed to the less representative JSE index which is overweighed with foreign listed stocks, the market fell almost 50 per cent from its peak in late January 2005 - the peak was approximately three months later using the JSE index - to its apparent trough in the first half of July 2006, at which point, many seasoned observers thought it looked severely oversold.
The issue of whether it was a good time to get back into the market was addressed head on at Wednesday night's Mayberry forum themed "The Wisdom of Investing in Equities", where some of Jamaica's top fund managers and stock market analysts gave their views on investing in the stock market.
MARKET BOTTOMING OUT
Whilst agreeing with the consensus view that the market was bottoming due to an improving macroeconomy and increased aggregate demand, Prime Asset Management's managing director Rezworth Burcheson was nevertheless cautious, arguing that the market could take 12-15 months to recover.
Though fully endorsing the view that equities have been the best long term investment asset class in Jamaica, he was concerned that if stocks were cheap more companies should be purchasing their own shares.
Stephen Gooden, manager of Pan Caribbean's $3.8 billion Sigma Optima Equity Fund (formerly managed by Burcheson) expressed a preference for growth over value stocks, although noting that growth stocks can become value stocks and vice versa.
For example, between 2000 and 2004, the investment houses had been regarded as growth stocks and had been valued accordingly with price earnings ratio's in the double digits, whilst Dehring Bunting & Golding had moved into the value stock category at its recent price low of five times earnings.
Perhaps unsurprisingly, financial analyst John Jackson appeared to be the most bullish on the market's prospects.
He suggested that with interest rates at their lowest level in years (and likely to fall further) the market's current price earnings ratio of 7.7 was too low. Moreover, many stocks were scarce as the supply had dried up over the last two to three months.
Nevertheless, whilst the stock market may have bottomed, it is still difficult to find growth stocks in the current environment, defined as stocks increasing earnings and growing revenues in real terms after inflation.
DERTH OF GROWTH STOCKS
The majority of listed companies are continuing to experience flat to falling net profits, although in some cases this reflects the effect of one-off items flattering previous years results.
A good example of the current difficulty in finding growth stocks is RJR, whose chairman Lester Spaulding announced at the media company's annual general meeting last week that market conditions had been among the worst in his 15 years in media.
Net profits fell to $93.3 million for the year to March 2006, reflecting the impact of the inclusion of a non-recurring $58.9 million insurance claim in the previous year's results
He advised that the trend of their poor first quarter had continued into the second quarter, affected by the cement crisis and increasing costs, particularly insurance, transport and energy, although prospects looked brighter for the third "Christmas" quarter. RJR, like many of its listed peers, appears to be 'buying growth' with its acquisition of 100 per cent of Jamaica News Network (JNN) and 65 per cent of Reggae Entertainment Television Limited (RETV) in return for 18 million newly created RJR shares.
The dilution of existing shareholdings does not appear excessive however, as it represents an increase of only 5 per cent in the issued share capital of 360 million shares, particularly if you believe, as Mr. Spaulding asserted, "that it would cost RJR more to create from scratch."
ECONOMIC RECOVERY KEY
The key to the stock market outlook, however, is the continued recovery in the economy. The rise in third quarter business confidence was similar to the recovery in the stock market over the quarter, but electoral uncertainty appears to be negatively affecting domestic business investment plans. Second quarter growth in GDP of 2.6 per cent, driven by the recovery in agriculture and strong tourism, though much better than the zero growth recorded in the June 2005 quarter, is far from robust.
Growth in third quarter is also estimated to be 2.6 per cent, but a better 2007 is potentially vulnerable to the impact of the new passport requirement for U.S. tourists on the industry next year. As interest rates continue to decline, many stock market analysts, such as those at the Mayberry Forum, now prefer real sector stocks such as Lascelles, Jamaica Producers and Seprod, to the financial sector stocks that formerly dominated the market.
However, faster economic growth will be needed to drive the increased profitability required to justify a significant rise in the price earnings multiples of these companies.
keithcollister@cwjamaica.com
