Shane Ingram, Stockbroker
INGRAM
If 2006 had emerged into the year it appeared destined to be, it would have been a miserable Christmas for stock market investors.
But events towards the end of the year triggered renewed market confidence, giving stocks a needed lift.
With the main JSE Index down as much as 23 per cent in early April, it was the bull-run in November, albeit short-lived, that pegged year-to-date (YTD) losses at under 6.0 per cent as at mid-December.
Retrospectively, the year was marked by fragile investor confidence brewed from depressed company earnings for the first half of the year, as well as uncertain political conditions offsetting modest local economic recovery, calm currency market conditions, all-time lows in money market rates, and sober international forces due to retreating international oil prices.
There were two distinct troughs in the year (see Graph 1): first on April 13 when the index dipped to 80,414.68 points and again on July 12 when it measured 83,817.20 points. The first low had its roots in the lower year-end results of 2005 brought about by the protracted cement crisis impacting domestic income.
The tail-end of this cement shortage also stunted corporate earnings for the first quarter, which caused prices to slide further to another low in July.
WINNERS AND LOSERS
The top five winners were rather unconventional stocks. The five best performers increased by an average of 36.4 per cent, led by Salada Foods that jumped close to 300 per cent since the start of the year (see Table 1).
However, the real 'movers and shakers' actually came immediately outside the top five: National Commercial Bank, up 24.3 per cent, Lascelles deMercado, up 18.2 per cent, Dehring Bunting and Golding Limited, up 17.8 per cent, and Bank of Nova Scotia Jamaica, up 16.2 per cent.
On the other hand, some 25 stocks numbered among the losers with the greatest blow to the main index likely landed by the heavily-weighted Guardian Holdings that dropped close to 40 per cent.
ON THE SIDELINES
Investors were mostly on the sidelines throughout the year as reflected in the modest daily volumes.
Supreme Ventures leads YTD volumes with over 1.2 billion shares moving since the start of the year but most of the activity related to crosses, possibly between institutional clients.
More persistent attention was directed toward Jamaica Broilers (JBG), Cable and Wireless Jamaica (CWJA), National Commercial Bank (NCBJ) and Life of Jamaica (LOJ) throughout the year.
Appetite for JBG widened news of initiatives to sell power to JPS and engage in ethanol production.
CWJA was always appealing given its heavily discounted price to earnings (P/E) and price to book value (P/BV) ratios, which was enhanced by robust profit growth in the September quarter.
NCBJ impressed the market with healthy earnings while investors bought into the resilience of LOJ and the promise of its real-estate development activities.
MARKET BEHAVIOUR
Typical of most developing markets, there was a disjoint between investor behaviour and economic data.
While investor confidence waned, the local economy registered three consecutive quarters of growth to register an estimated 2.5 per cent growth in GDP for the period January to September. The recovery was powered by the services sector that expanded by 3.3 per cent and goods production went up 0.4 per cent.
Economic growth was robust in the third quarter (2.7 per cent), which corresponded with the most favorable period of corporate earnings recorded for 2006.
Jamaica's economic progress also anchored positive reviews from international agencies including Bear Sterns that credited a 'surprised' economic rally in August and September for its upgrade on Jamaican debt from 'market-perform' to 'outperform' in October.
Unfortunately, only the bonds market digested this information - enough to trigger a sharp rally in global bond prices shortly after the release of the report.
$25B DEFICIT
The fiscal situation also improved as echoed in the period from April to October 2006 that saw Jamaica's fiscal numbers reflecting a deficit of $25.26 billion, or $1.145 billion less than the budgeted amount. Revenue and grants came in at $113.05 billion or $2.31 billion shy of target, due to a shortfall in tax revenue ($2.38 billion) and grants ($1.13 billion).
However, total expenditure was restrained at $138.31 billion, under the expected $141.76 billion, with capital spend deviating favourably from its target by $3.65 billion.
Local companies also benefited from reduced inflationary impulses. In fact, administrative expenses at most listed companies were contained below 10 per cent as local inflation returned to single digit.
November's inflation outturn of -0.2 per cent followed on the -0.1 per cent recorded in October to mark the first time in almost four years that the Jamaican economy has registered two consecutive months of deflation.
With such tempered movement in prices since the start of the year, point-to-point inflation at November 2006 surfaced at 5.2 per cent, down from 12.8 per cent at the same interval last year.
FOREX EXUDES COMPOSURE
There was also some negative reinforcement from the declining local interest rates. With inflation firmly in single digit, the monetary and fiscal authorities steadfastly pursued their mandate to normalise the yield curve and reduce interest expense accruing to local debt. Consequently, the indicative T-bills (182-day) saw consecutive month-over-month declines to 10-year lows.
Simultaneously, the currency market exuded composure. There were, of course, bouts of volatility orchestrated by rapacious broker demand, but the danger was repeatedly averted through the BoJ's interventions below 10 per cent as local inflation returned to single digit.
November's inflation outturn of -0.2 per cent followed on the -0.1 per cent recorded in October to mark the first time in almost four years that the Jamaican economy has registered two consecutive months of deflation.
With such tempered movement in prices since the start of the year, point-to-point inflation at November 2006 surfaced at 5.2 per cent, down from 12.8 per cent at the same interval last year.
FOREX EXUDES COMPOSURE
There was also some negative reinforcement from the declining local interest rates. With inflation firmly in single digit, the monetary and fiscal authorities steadfastly pursued their mandate to normalise the yield curve and reduce interest expense accruing to local debt. Consequently, the indicative T-bills (182-day) saw consecutive month-over-month declines to 10-year lows.
Simultaneously, the currency market exuded composure. There were, of course, bouts of volatility orchestrated by rapacious broker demand, but the danger was repeatedly averted through the BoJ's interventions.
With record levels of currency reserves and ever improving artillery from robust inflows from tourism, the BoJ maintained a light but ominous presence in the market. Consequently, the dollar conceded ground of less than 6.0 per cent to the US dollar at the end of November. Together with flattened FED rates, there was little appeal in US instruments.
TURNING POINT
When the long-term moving average rate intersected the short term moving average in early November, it was evident that the much anticipated turning point had been reached. Brokers commented that investors' outlook gradually became positive as it became apparent that the general elections would likely be postponed until after the Cricket World Cup in March-April 2007.
Simultaneously, the positive economic developments since the start of the year were borne out in corporate earning cards for the third quarter.
Whereas sales remained tight at trading firms, profits improved due to tamed financing and administrative expenses stemming from lower inflation and interest rates. Several listed companies also recovered from the losses at the same interval in 2005 due to the absence of hurricane activity.
Of course, the record-low interest rates acted as a double- edged sword compelling commercial and investment banks to grow business volumes and eke-out non-interest income streams to secure improving profits for the quarter.
The return of pension funds to the local equities market also supported November's rally.
Pension funds were relatively absent in the early part of the year, due largely to changes in pension regulations that called for adjustments in equity holdings.
But having gone through the adjustments, pension fund managers, as well as other institutional players, pushed prices, volumes, and value traded for the period.
November also benefited from anticipated buying surrounding pending cash inflows from the BNSJ/DB&G and Courts offers.
With billions expected to be in the hands of investors during the latter part of December, many investors opted to take early positions that prompted the average 14 per cent price rise in stock prices for November.
The Outlook
The year's economic developments have given birth to an optimistic outlook for the Jamaican economy in 2007. This favorable view comes against a backdrop of the government's ongoing commitment to fiscal discipline, higher growth prospects stemming from World Cup Cricket as well as inflows of foreign direct investments in the tourism and mining sectors, and on-going recovery in the construction sector.
The alternative markets - currency and money - should also remain positive, given the BoJ's ability to defend the dollar and maintain interest rates due to single digit inflation.
Ultimately, however, growth in equities will depend heavily on the extent to which the cash from the BNSJ/DB&G and Courts offers re-enters the market.
Valuations are already attractive so all that is needed now is for company earnings to sustain the current uptrend, and for advisors to trumpet the best investments for 2006 - stocks.
Happy investing in the New Year.
Shane Ingram is an equity analyst and stockbroker in the Stockbrokerage Unit of Dehring Bunting & Golding Limited. Email: singram@mydbg.com.
