Jamaica is the leader of the Caribbean — Gregory Fisher

Volatility may return to the US stock market


Wednesday, January 31, 2018

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Jamaica's “bond king”, Gregory Fisher, in his opening speech at the 12th Jamaican Stock Exchange Conference, quoted approvingly Sandals CEO Adam Stewart.

“In 45 years, we have not seen the confluence of events that's taking place right now – inflation at four per cent, unemployment at 11.3 per cent, and long-term interest rates at eight per cent...Jamaica is ideally poised as a leader in the Caribbean and an international icon of a turnaround story.”

Fisher adds that Jamaica is now in fact the leader of the Caribbean economic community, giving kudos to Prime Minister Andrew Holness for steering the ship of state, while observing that Forbes Magazine has also made Jamaica its highest- ranked Caribbean Community country.

After an incredible +14.3 per cent return in 2016, Fisher observes Jamaican Eurobonds once again outperformed in 2017, when, according to JP Morgan Index data, the Jamaican sub-index tightened in spread by 70 basis points giving investors a total return of +14 per cent.

In other words, the Jamaican Bond curve outperformed the Emerging Market Bond Index (EMBI) by a resounding +471 basis points (one basis point is one hundredth of one per cent) in total – a magnificent accomplishment!

The three ingredients to Jamaica's stellar performance were, firstly: market confidence due to the precautionary IMF Stand-By Agreement.

Secondly: a near-balanced budget, where Jamaica outperformed not only its Latin American and Caribbean peers by a very wide margin, but both developed and emerging countries generally. This has allowed a “crowding in” effect, with falling government interest rates increasing capital flows to the private sector.

Thirdly, we are finally seeing major signs of economic growth, the Holy Grail needed to lower the debt/GDP ratio, after many decades, and the market is taking note.

Lower local bond market supply, and improving fundamentals in the current global environment mean bond spread compression (US 10-year treasury bond yields are only two per cent below Jamaica).

In his view, if the Jamaican policymakers remain vigilant and stay the course, avoiding complacency, he expects another double-digit return here in 2018 for Jamaica global investors, and finally a ratings upgrade.

Fisher has been the lead sponsor of the annual stock exchange conference for 12 years, and his firm, Jefferies, was once again lead sponsor at this year's JSE conference. Jefferies, a global investment banking firm with offices in more than 30 cities around the world and nearly 4,000 employees worldwide, has a full range of services including capital markets, financial advisory, institutional brokerage, securities research, and wealth management. It is a Fortune 500 company, with US$11 billion in long-term capital.

Looking at the US, Fisher adds, despite a very contentious election in 2016, 2017 was a year where absolutely no investor fear existed in the markets — especially the markets in the United States.

In the US, by the end of last year, the S&P 500 closed at a trailing P/E multiple of 23 times, which is even higher than the peak we witnessed way back in 2007.

Recent sentiment polls show an overall 65 per cent bullish opinion, eerily reminiscent of that fateful herd mentality we all witnessed back in 2007.

He adds that he doesn't believe history is about to repeat itself, but that he doesn't see how a below three per cent average US GDP growth forecast has all the pundits predicting yet another record year for the S&P 500 after last year's stellar performance.

He advises investors to enjoy the rallies while they last, but be ready for a major US stock market correction.

Signs of froth in this late-cycle US bull market include the Bitcoin run-up (over 1,000 per cent last year), a 50 per cent surge in the FANG stocks (Facebook, Amazon, Netflix, and Google), and the sale of a painting that “might” be an original Da Vinci for nearly US$500 million.

In 2017, US stocks were up about 20 per cent, yet 2017 earnings were up 10 per cent. So, for the pundits to be accurate with their stellar 2018 US stock market predictions, says Fisher, US corporate earnings must shine an additional 15 per cent in order to keep the extended bull market alive and well.

He adds that 2018 will see a new and untested Federal Reserve (Fed), with far less overall years of experience, continue the task of normalising interest rates and trimming down its bloated balance sheet, particularly after the passing of tax reform.

What keeps Fisher up at night is the worry that the new Fed will overtighten. The history of new Fed chairs is that they always overtighten—and he believes Chairman Powell will be no exception, citing as examples Volcker in 1979, Greenspan in 1987, and Bernanke in 2006 — all periods when the stock market soon saw the consequences of new Fed chairs being overly aggressive when it came to policy normalisation after previous periods of lower rates. In all these examples, rates of overall economic growth began to peak concurrently.

In short, you can't fight the Fed!

In his view, 2018 will be an all-out tug-of-war between the US stock market and the Fed.

Fisher adds, in his view, markets will endure lower rates for longer than most anticipate, as real growth indicators - inflation or wage growth - just don't exist right now.

Combined with oppressive global debt burdens, and ongoing geopolitical issues, Fisher maintains the need for investors to have an “income” strategy of both global bonds and stocks that pay coupons and dividends. Finally, he observes that despite the S&P 500 advancing nearly 300 per cent since the spring of 2009, the US yield curve is still flat, which to him signals the return of market volatility in 2018, after being almost non-existent last year.

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