A perfect storm for investors

Business confidence up, inflation up, interest rates down and revalued J$


Wednesday, January 24, 2018

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While the US celebrates its 9th anniversary of a bull market, Jamaican investors are also enjoying a stock market with a rising tide. Since 2015, local stocks have mainly been on an overall upswing.

The question investors are asking is: Is it sustainable? Well, the consensus by local stock watchers is that you have to invest with knowledge.

On January 22nd trading the stock market revealed that prices dipped on the Main Market of the Jamaica Stock Exchange (JSE), leading to the JSE All Jamaican Composite Index diving 3,788.87 points to 307,935.64, and the JSE Index dropped 3,452.09 points to reach 280,564.20.

So is that a dip? Impending tumble of prices?

Well, maybe not.

Something that must be considered is that interest rates have a strong impact on how investors view the attractiveness of stocks. JN Fund Managers notes that, “Effective January 18, 2018, Bank of Jamaica will be reducing its policy interest rate offered on overnight placements with the bank. The rate offered on overnight placements will be reduced from 3.25 per cent per annum to 3.00 per cent.”

So lower rates mean that investors seeking a higher return have to park their money somewhere else.

Also, during the October to December quarter, Jamaica's business confidence was 5.5 per cent higher than the 135.2 recorded in the previous quarter and 0.42 per cent higher than the corresponding quarter in 2016.

Another piece to the economic puzzle is that Jamaica's inflation rate rose month over month to 0.6 per cent, relative to a similar increase in the prior month. For the month of December and 2017 calendar year, year-over-year inflation rose to 5.2 per cent relative to the 4.9 per cent recorded last month; whilst fiscal year-to-date inflation rate was 4.2 per cent.

And we can't leave out the impact of the possibility of a strong revaluation of the local currency.

Investing guru John Jackson writes on his blog that “in such a situation the local dollar could fall below $120 to the US with $116 [seeming] like a possible level”.

Jackson continues, “The Jamaican dollar lost value almost directly as a result of prolong[ed] period of excessive fiscal deficit that Government ran for decades. Government is now running fiscal surpluses and that will keep inflation and interest rates low for a prolonged period and should result in a sustained value for the local currency. Importantly, with increased production of goods and services many Jamaican companies are enjoying a period of increased productivity that augurs well for increased competitiveness, which lends support to the recent revaluation. Come 2019, a major portion of electricity generation will be at reduced rates as JPS switches to new sources of electricity generation that should add more to productivity.

“A number of positives have taken place. The fall in the price of oil on the world market has been a major savings and gone a long way to ease pressure on the Jamaican dollar. But other imports have fallen as well with the devaluation of the local currency while non-traditional exports have been rising fast. The BPO sector along with tourism have done very well in earning added inflows. The net result is that the country's current account has improved considerably at sustainable levels. The full restoration of Alpart's operation means even more foreign exchange earnings for the country.”

This means good news for the financial prospects of companies listed on the JSE.

That said, JN Fund Managers offers six picks for investors ready to commit to participating in the growth of the economy.

NCB Financial Group Ltd — The NCB Financial Group (NCBFG) achieved net profit of $19.1 billion for the year ended September 30, 2017, an increase of 32 per cent over the prior year. NCBFG continues to place emphasis on strategic initiatives in restructuring its core business by seeking opportunities to grow organically and inorganically throughout the Caribbean by utilising technology to improve efficiency and enhance profitability.

Jetcon Corporation Ltd — Revenues increased 24 per cent to $333 million in the September 2017 quarter compared to the same period last year, and is up 45 per cent in the nine months to September this year over the same period in 2016. Net income improved by 59.9 per cent or $18M of the thirrd quarter ending September 2017 relative to the corresponding quarter last year.

Pan-Jam Investment Ltd — During the third quarter of 2016 the group, completed an exchange of securities that resulted in the divestment of its shareholding in Mavis Bank Coffee Factory Ltd. This resulted in a gain on disposal in the quarter of approximately $665 million which, net of minority interest, increased net profit attributable to shareholders by $416 million. The 2017 Q3 net profit attributable to shareholders of $1,215M represents an increase of 35 per cent over Q3 2016 absent this gain.

Sagicor Real Estate X Fund — XFUND reported net profit attributable to shareholders was $2.4 billion for the third quarter of 2017 (Q3 2017), a 40 per cent increase over net profit of $1.7 billion during period ending September 30, 2016. This increase in profitability was attributable to realised gains in its Sigma Funds units and the positive performance of their Sigma Real estate portfolio.

Caribbean Cream Ltd — KREMI reported a net profit of $35.6 million for the second quarter of 2017 (Q2 2017), a 23 per cent decline over net profit of $46.4 million during the quarter ending August 31, 2016. The decrease in profits was attributable to direct cost outpacing the rise in revenues during the quarter. Despite these setbacks, KREMI continues to be focused on improving cost efficiency.

Access Financial Services — Net profit for the second quarter ended September 2017 declined by 23.74 per cent to US$157 million when compared to the corresponding 2017 period. During the period under review, they acquired net assets of Micro Credit Ltd, in line with their overall strategic plan.




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