Vantage Point with keith collister

On Wednesday this week I asked a high-powered financial services panel assembled for the fifth annual Caribbean Master's of Business Administration (MBA) conference their views on the economy, the exchange rate, interest rates and the stock market.

JMMB's group investment strategist Julian Mair set the tone for the debate, arguing that the critical issue local investors need to ask themselves is: "What currency am I most comfortable in?" Stating that while he was currently relatively indifferent regarding holding Jamaican versus U.S. dollar assets, he argued, however, that it would be very difficult to cut interest rates more than 50 basis points (half a per cent) this year. This was because the current level of inflation of around five per cent was the "best Jamaica will do", and interest rates are already relatively low.

While NCB Capital Markets Managing Director Chris Williams stressed the importance of "avoiding shocks" in achieving a good economic performance, he also saw domestic interest rates as likely to be "flat", while seconding the view that maintaining the right interest differential was critical to exchange rate stability. However, he believed that lower interest rates were necessary to really "kick-start" the equity market enough to absorb new initial public offerings (IPOs).

Right Direction

DB&G's Garfield Sinclair agreed that the numbers were "pointing in the right direction" with three per cent growth likely for 2006, and a well-managed exchange rate. He expected a slightly better growth performance in 2007, with continued depreciation of around three to four per cent a year.

This consensus view was echoed by BNS's Anya Schnoor, who stressed the positive economic effects of the Cricket World Cup and the three to four large hotels scheduled to open this year.

Senior Vice-President Schnoor added that with Jamaica's relatively large external debt repayment essentially pre-funded, the effect of the election on the financial markets was unlikely to derail the current relative macro-economic stability particularly as the policies of both parties were "pretty similar", with both parties committed to the fiscal discipline required by the international capital markets.

Gary Sinclair agreed, arguing that whichever party won would have very limited discretion on spending as our "debt put Jamaica in a box", and default would be "suicide" for any party adopting this "heretical" position.

Pan Caribbean's Philip Arm-strong agreed, stating that he expected the tight fiscal management to continue. He added that even without raising additional money abroad, Jamaica had the net international reserves to repay its external debt obligation this year, although he did not anticipate any difficulty tapping the international capital markets this calendar year.

NCB Capital Markets Chris William's cautioned as to whether we could take it for granted that both parties would "stay in the box", pointing out the poor fiscal performance in the last election year in 2002.

In short, there appeared to be a remarkable consensus in the panel that this year would see a slightly better economic performance than last year (driven by tourism), relatively low inflation and near currency stability (assuming only a very small cut in interest rates) driving a mildly positive stock market performance (with at least four initial public offerings lined up waiting for better market conditions according to Mr. Chris Williams). Despite this being an election year, they expected fiscal prudence from whoever formed the government, and that the repayment of Jamaica's Eurobond maturing in 2007 would go smoothly with continued access to external finance.

Relatively Positive View

It is important to note that this relatively positive view on Jamaica is already incorporated into both the local and international markets, so that any disappointment, e.g. in the area of fiscal performance, could adversely affect the markets. The local market at approximately 12 times earnings is not cheap by historical standards, particularly excluding what looked like "bubble" level market PEs of some stocks in early 2005.

While the recovery of earnings in some stocks is likely to continue, it is likely to be more of market of stocks going forward rather than the situation six months ago when almost all the market looked cheap (with a few notable exceptions such as Surpreme Ventures). Nevertheless, relatively positive macroeconomic fundamentals and a continuing mild earnings recovery make for confident investors. Increasing investor confidence means stocks should continue to go higher (business confidence is likely to have risen again when the latest Jamaica Chamber Commerce survey is released next week), with the result that they should handily outperform the returns on local fixed income after tax in 2007, barring shocks.

Valued Stocks

Specific stocks investors should consider including the commercial banks - First Caribbean, NCB and BNS. Speculative investors could buy the independent money market players as likely acquisition candidates. Exporters such as Lascelles (and perhaps Jamaica Producers) look attractive near current levels, while Trinidad Cement and Seprod look good bets for those interested in manufacturing plays. Value plays such as Pan Jam and First Jamaica continue to look attractive for conservative investors, while two 'dark horse' recovery plays would be Grace and Hardware and Lumber, although conservative investors may want to wait until after the financial year-end in case of 'restructuring' provisions.