Vantage Point With KEITH COLLISTER
Over the past month and a half since the election, the Jamaican stock market has traded in a lacklustre fashion.
While in part this reflects the increased recognition of fundamental long-standing economic weaknesses in the Jamaican economy, many of which have been becoming ever more apparent over the past several months, it also reflects other factors that typically impact stock markets such as confidence - and its close relative, momentum - earnings and liquidity.
Any positive stock market momentum that might have been expected from a new government replacing an 18-year-old one has been outweighed by the negative impact on confidence of the poor macroeconomic situation, particularly the anticipation of the larger-than-expected fiscal deficit that was finally revealed in Parliament.
Partly as a consequence, the new Government's honeymoon period has been extremely short, even non-existent.
CORN AND JAMAICA BROILERS
Corn hit a 10-year high of over $4.50 a bushel last February amid soaring demand for ethanol, which is distilled from corn in the United States.
The consequent rise in the price of ethanol also prompted a surge in the construction of new ethanol plants in the U.S., with the result that ethanol supplies overtook demand.
Prices of ethanol have since plunged, dragging corn down more than 20 per cent from its peak.
When we last commented on Jamaica Broilers at a much higher price, we suggested that we only liked the stock close to $4 or even less, reflecting our perception that it is a relatively risky stock that should not be bought at a premium to the overall market - a position we continue to maintain.
In addition to making investors more comfortable with its economic risks, the company will need to significantly improve its overall transparency for the market to reward it with an improved multiple, and consequent higher stock price.
MARKET CONFIDENCE
The recent surge of consumer and business confidence revealed October 2 reflected rising expectations from a survey that was largely completed before the election.
The survey revealed that consumer confidence rose from 135.6 in the second quarter to a new all time of 163 in the third quarter.
"It is not surprising that elections have an impact on people's financial confidence given that economic policies do affect economic outcomes," said survey leader Professor Richard Curtin.
"While there is no downside to election euphoria prior to the vote, the winner must astutely manage the transition to more realistic expectations to avoid a sudden collapse in confidence. Much can be accomplished during the traditional honeymoon, when both sides are willing to adopt more rational expectations for economic policies without causing a plunge in confidence."
Business confidence also reached a new peak, but according to the survey, this outcome, unlike the results of the consumer survey, "was not due to an unusually large recent gain."
The much more measured rise in business expectations was actually mirrored by a stock market rally in the first two months of the last quarter.
If we look more closely, however, the pre-election stock market performance is actually broadly in line with the relatively small rise in business confidence from 123.9 to 134.2.
It is also consistent with Professor Curtin's comment that "firms reported slightly less positive views of current economic conditions even though they thought the outcome of the election would have a net positive impact on the economy in the year ahead."
It is worthy of note that during the PNP's presidential race last year, consumer confidence also rose sharply by a similar percentage to that of the recent election, again driven almost entirely by expectations.
But, after reaching what was then a new high, consumer confidence remained essentially flat for a year.
VICTIM OF EXPECTATIONS
Jamaica's new government, already a victim of high expectations that it will find difficult to fulfil, will require concrete evidence of performance over the next couple of months for business confidence, and the stock market, to rise significantly.
An additional problem for the local stock market is that most companies' earnings still look weak, and even the few companies that continue to see healthy earnings growth, such as NCB, have not been rewarded with a higher price.
The result is that NCB's price-earnings ratio has continued to fall, something typical of a bear market.
Demand for local stocks is also low due to competition from 'alternative' investments, the recent rise in interest rates - always negative for stock markets - and the weak dollar.
The Bank of Jamaica's heavy intervention in the foreign exchange market also reduces Jamaican dollar liquidity, negatively impacting the local market.
keithcollister@cwjamaica.com
