Jamaica’s 2016 investing themes - Navigating through uncertainty

BY RAMON PITTER

Tuesday, January 12, 2016

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Given
the significance of the macroeconomic and political events taking place in 2016 in Jamaica, it might be easy to be uncertain about where to invest capital this year. This particular period in the lifespan of the IMF programme, the upcoming injection of capital into the financial system, and the uncertain global economic climate all play their part in confounding even the most savvy investors about what the best investing strategy should be for the next few months.

I’ve had a number of questions related to this topic during the latter part of 2015 and offer my thoughts on the key investing themes that I see unfolding in 2016.


 




EQUITY — NOT CASH — IS KING


Without some exogenous shock to current fundamentals, I expect the equity story (ie strong stock market performance) to continue to play out in 2016 as more liquidity enters our system and the macro picture continues to stabilise. Debt costs will continue to get cheaper and equity will be the direct beneficiary.


If we see any acceleration in GDP growth as well, we will get an added lift to not only company performance but also the multiples you should be willing to pay for these businesses.


My advice here is not to completely rotate out of bonds or real estate, but you should feel fairly comfortable increasing your equity allocation.


Pay attention to the names that haven’t participated as much in the stock market surge. There are still some good companies out there trading at attractive multiples (eg GraceKennedy, Jamaica Broilers, Pan Jam).


 




THE REGIONAL PLAY


We are fortunate that a number of Jamaican companies are looking at expanding their reach offshore and into the wider region. This creates a massive growth opportunity for the companies that can successfully put their flags (and not just signal their intent) into other regions outside of Jamaica because it widens the customer base for the company.


These entities should be rewarded with richer multiples/higher valuations if key criteria are met — but some work has to be done before handing over your hard-earned cash for a piece of the opportunity.


I’ve spent a fair amount of time working in this space myself, so my advice when evaluating is to ponder three questions:


1) How large is the opportunity? (Belize and the Dominican Republic are two vastly different opportunity sets, for example)


2) Does the company have a history of being able to enter new markets and the right management expertise to do so?


3) What is its strategy for success in each new market (because in most cases they are different)?


Do your research here and don’t just assume that because a company has said it is going regional that this means it is now a better investment.


 


THE CURRENCY WAR


There is no denying the currency argument if we are ,having a discussion around investing. Devaluation has and will continue to be a reality. The important question, however, is always: Will you be compensated enough to keep your investments in Jamaican dollars?


Most people will choose to play it safe and only seek out US dollar investments, but the reality is that those who invested heavily in the Jamaican stock market last year beat most other US- based investments by a wide margin, even on a currency-adjusted basis.


Though there is the possibility that the liquidity event in February could put some pressure on the currency during the start of the year, returns on Jamaican dollar investments (especially equities) still look worth the risk reward in my view.


The Goldilocks investments could be Jamaican dollar equity investments in hard currency earners. They provide an ideal hedge and these investments should be valued more than their non-hard currency-earning counterparts.


 




THE NEW ENERGY PARADIGM


This year will be a pivotal one in Jamaica’s energy landscape. There is significant momentum in both lowering our energy costs as well as continuing the wave of alternative energy solutions that have popped up over the last few years.


Not only will this be significant for the country’s prosperity and the multiplier effects it could have for the economy and companies, but it will also provide some very interesting investing opportunities for the institutional and general public (both debt and equity investments).


These businesses are very capital-intensive and so will require a significant amount of funding. I would stay tuned here. The Energy and Utility space because of its stable debt-like returns and how long term the projects are, will generally produce attractive securities for investment.


While these themes are by no means exhaustive, the above list will hopefully offer investors a guide for where at a minimum they can begin their research.


Overall, and happily I might add, I believe the Jamaican investing picture looks quite bright. Assuming that we stay the course economically, we should all be happier and a bit wealthier at the end of the year.







Ramon Pitter is vice president — Corporate & Business Development for Seacorp Holdings


  

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