Keith Collister, Contributor

The last day of trading saw the main JSE index fall sharply by 3,583 points, bringing it below the psychologically important 100,000 barrier. While some of the fall was undoubtedly due to the $50 fall in the price of locally quoted RBTT to $340 (on the back of a mere 500 share trade) the more representative Jamaica All share index also confirmed the weakness in the market, falling by approximately 2,398 points, leaving this more representative index only marginally up for the year so far. The advance/decline ratio of 15:4 was also highly negative.

The local stock market is very sensitive to local investor confidence and the economy (in particular expected growth prospects), so it is worthwhile looking at both confidence and the macroeconomic situation to see if anything has changed compared with the outlook at the beginning of the year.

Despite business confidence being reported as flat by the Jamaica Chamber of Commerce in mid January, I remain mildly positive on the local market in that I expect it to significantly outperform local fixed income after tax this year. However, I expect much of the anticipated gain to come in the second half of the year after an election, whenever it is called.

As previously mentioned in this column, we did not see a January effect (highly positive stock market performance in the month of January) this year, and investors appear to have taken a fairly cautious approach to the market so far this year. Apart from the general fact that markets don't like uncertainty, the current economic environment is still far from exhibiting "take -off', with final quarter real GDP estimated at 2.7 per cent, just above the estimate for last year's GDP of 2.6 per cent.

PIOJ's projection

The PIOJ's projection for the first quarter of 2.9 per cent is still below the seeming barrier of 3 per cent growth, and I do not believe the impact of Cricket World Cup will be tremendously positive for Jamaican economic growth in the second quarter. This means that the economy will need to accelerate markedly in the second half of the year, significantly above 3 per cent, to meet my estimate of final year economic growth of 3.5 to 4 per cent of GDP for 2007. Better expected growth is of course one of the factors governing my view of a better second half performance for the stock market.

I still believe this is possible if pro growth measures are taken in the budget to help formalise the informal sector, combined with a likely continued fall in interest rates. I don't believe the 12 per cent rate on 180 day Bank of Jamaica repo's represents a "psychological barrier" to further cuts in domestic interest rates in an environment of improved business confidence clearly rates won't be cut further while the foreign exchange rate is unstable. The BOJ Governor has made it clear that Jamaica needs to continue on the path of interest rate reduction, and a further fall in interest rates is consistent with his forecast of headline inflation of between 6 and 7 per cent.

The main thing that has changed since the beginning of the year is that the budget deficit for this fiscal year is now expected to be between 3.5 per cent and four per cent, more than last year's 3.3 per cent deficit, instead of the projected 2.5 per cent.

While the likely miss of the fiscal target has apparently already been communicated abroad, it still has not been confirmed locally by the Minister of Finance. While the attendees of the Bear Stearns credit conference in mid January were apparently told the Government would miss their fiscal target, as at the 25th of January, Bear Stearns were still projecting a deficit of only 2.8 per cent (in line with my beginning of the year projection of a deficit of just under three per cent of GDP), and Bear Stearns had apparently not formally changed the projection even after they saw December's poor fiscal numbers.

In fact, in their February 1st Central America and Caribbean report, Bear Stearns advised they "believe the deficit is falling", but that "The market will want to see a continuation of the deficit reduction trend.", the latter being a point with which I agree. It is not clear however their reason for saying the deficit is falling, as year to date it is significantly higher than last year in dollar terms.

This view begs the question as to whether a bond issue for Jamaica is in the works. The minister and his team went to Europe from February 2-10, 2007 immediately after the release of December's poor fiscal numbers, so it would be interesting to know what they told foreign investors the eventual deficit outcome would be. International bond prices have remained basically unchanged for the past week since his return, but it is unclear as to whether this reflects the fact that local estimates of the final fiscal deficit are too high, or that the international market is simply in a forgiving mode due to plentiful international liquidity.

Positive

I remain positive on both BNS and DB&G despite the recent controversy over whether the proposed share exchange of BNS Jamaica shares for shares in a combined Scotiagroup (which would now include both BNS Jamaica and BNS Canada's combinedholding of DB&G shares) is fair. At its last traded price of $25.72 BNS is only just over 11 times its full year earnings per share of $2.32. At $25.50 DB&G would also appear to be a buy on NCB's projected earnings of $3 a share (or only eight and a half times expected earnings). Lower rated DB&G's earnings ($542.6 million for the nine months to December) will now become part of Scotia Group's earnings (BNS Jamaica alone made nearly $6.8 billion for the full year), so investors should benefit from BNS's higher multiple relative to DB&G.

There is still an issue of whether the price of $19.76 to be used to transfer the shares of the Group to BNS Canada is fair. Minority shareholders are unlikely to be persuaded that it make sense to use the average price of BNS in the six months prior to the bid when BNS is simultaneously using the price at which it purchased DB&G to value those shares. As the transaction was one where these details were apparently agreed together not disclosed, minority shareholders may want an independent valuation.