Cautious optimism for stock market — James

Sunday, June 26, 2011

FINANCIAL analyst Vernon James says although there is increased buying interest on the local stock market, investors are approaching their equity investments cautiously.

James told Sunday Finance that there are a confluence of factors that make equities an attractive investment at the moment. Among them are the current low interest rate environment, which he said has increased the ferocity of the search for more attractive investment options by both institutional and retail clients. He added that the attractive dividend yields of a number of companies have also increased the attractiveness of the stock market, as well as improving economic prospects with the economy expected to record growth this year.

"Investors have been keen on these issues and with the attractive valuations in the market, buying interest particularly from institutional investors such as pension funds has increased," said James, who is vice-president of sales and client services at NCB Capital Markets.

He added, however, that there seems to be a disconnect between equity buyers and sellers which means that both parties are often at odds as it relates to a fair market price for stocks.

"This has contributed to the observed lethargy in the overall movement in stock prices. In addition to this, there are still perceived risks to the economic recovery," noted the financial analyst.

"So we anticipate further upward movement in the stock market, but at a deliberate and moderate pace," he said.

Similar to other analysts last week, James said that a weak domestic economy dampened the gains that the stock market was expected to make after the February 2010 implementation of the Jamaica Debt Exchange (JDX), when the average yield on Government of Jamaica (GOJ) Jamaican-dollar denominated bonds fell to 12 per cent from 19 per cent.

"Despite the success of the JDX, the local economic prospects were pretty weak. Unemployment was on the rise, remittances were falling, there were tax increases which all had adverse implications for consumer spending," he noted.

"These factors along with the JDX itself (given the implications for investment income) were expected to weaken corporate earnings as well as dividend payments. This translated into lower valuations and as a result lower share prices in the months following the JDX," added the NCB Capital Markets executive.

However, James pointed out that immediately following the JDX, the stock market experience a pick up in activity.

"At the end of February 2010 when the JDX was implemented, the Main Index stood at 79,094 rising to over 86,000 in the subsequent weeks. That was roughly a nine per cent return in one month. The index which tracks local stocks, the Composite index, rose by over 13 per cent over the same period. However, this momentum waned over time," he said.

Over the 16 months since the JDX, the main Jamaica Stock Exchange index has gained 13 per cent, with 25 stocks advancing and 13 declining over the period.