Stock market analysts hold a cautious but optimistic outlook for the next two quarters. In defence of this position, they contend that corporate earnings should improve during the last two quarters of fiscal year 2006 given the relatively quiet storm season, reduced local inflation and interest rates, restrained movements in the currency market as well as benefits promised from the World Cup of Cricket.

That said, it is important to review the stock market performance for the year to date.

Local Stocks Retreated

Local equity prices have retreated since the start of 2006 as a protracted cement crisis exacerbated already tight local economic conditions. The shortage of cement supplies grounded most productive sectors including construction and building-related activities, which significantly impaired corporate earnings for the first two quarters.

Disposable income, on the whole, has been under pressure as amply demonstrated by the shrinking GCT inflows to the government's coffers. Fragile investor sentiments arising from a change in leadership of the PNP as well as international geo-political tensions have also contributed to tempered appetite for stock over the review period. These negative forces are echoed in the average decline of 21% among the three main market gauges since the start of 2006.

The Insurance Sector

Although a highly concentrated industry, locally listed insurance companies suffered the heaviest price declines since the start of the year. Excluding the defunct and yet to be reconstituted Dyoll, Guardian Holdings and LOJ have shed 45.8% and 31% respectively.

The consolidation executed by LOJ during 2005 yielded dividends in the form of robust growth in revenues and efficiency, but the gains in these areas failed to keep pace with the number of shares to services thereby causing Earnings Per Share (EPS) to contract and Price Earnings (P/E) ratio to rise. Meanwhile, profits at GHL were quite erratic, and in fact negative (losses in recent quarters) due to volatility in RBTT's share price - the downward pressure on RBTT meant significant fair value losses written against profits.

Communication Stocks

Contrary to expectations, World Cup Football did little to halt the wane in profits and share prices of local communication stocks. As such, RJR, Gleaner and Cable & Wireless are down an average 32.1% since the start of the year. While RJR and the Gleaner have weakened approximately 25% since January, CWJA conceded 46% over the same period.

Apart from the hefty outlay to acquire exclusive rights to host these major events, these communications companies, particularly RJR and Gleaner, have been characterised by re-organisation initiatives over the last 12 months and so earnings have lagged behind the rise in costs. Competition, especially in the case of CWJA, has also been a major source of kryptonite for these stocks.

The Conglomerates

Conglomerates are by nature better able to resist the downturn in profits, and hence prices, due to their involvement in various forms of economic activities. Not surprisingly, conglomerates have given up only 11% of their values over the same period. Notwithstanding, once considered a behemoth in the local industry, GraceKennedy leads the losers with a share price decline of 40.5%, with PJAM and Jamaica Producers following with 26.4% and 10.2% respectively.

The sector's average performance was cushioned by actual YTD gains in Carreras and Lascelles deMercado, which have appreciated 16.7% and 5.3% respectively. Carreras is actually up 33.3% over the last 12 months but should or may not be considered a conglomerate given its exit from tourism activities. Carreras' strong dividend policy as well as the re-structuring activities (sale of Sans Souci and the move to Trinidad) have buttressed profits over the period, while Lascelles' success in turning around loss-making operations in addition to robust rum sales have aided the bullish tendencies toward the stock. Recent rumours of a buy-out have also helped to revive interest in the island's largest rum-manufacturer.

Financial Stocks

Given the sluggish stock market, declining interest rates, relatively orderly currency movements coupled with strong pull from the 'moonlight deposit-taking institutions', financial sector companies have found 2006 to be a challenging period. In fact, banking and finance-related companies are down an average 22% since the start of the trading year. Interestingly, CCMB and PCFS - two of the top five performers in the bull run of 2004 - headline the list of the poor performers so far in the year with respective price losses of 49% and 30%.

Within the sector, it is critical to note that the hybrid banking sector (investment/brokerage houses) have registered larger price losses than their core banking counterparts. Between CCMB, MIL, PCFS, JMMB, and DB&G, investor's portfolios have depreciated by average 36.6% since January.

This compares to an average decline of 6.1% within the core banking sector with FCIB (the largest regional banking entity) actually appreciating 13.8% since the start of January. Core banks have grown over the last two quarters on the back of rapid expansion in loans and improved operating efficiency.

Manufacturing Stocks

Excluding Salada Foods that is up 150% since 2006, manufacturing companies have lost close to 21% for the same period. Not surprisingly, Caribbean Cement is the worst performer in the sector - down 46.5% - as investors offloaded the stock amidst the cement debacle.

The overall pull on local income coupled with relatively high inflation rate stifled sales at most manufacturing companies. This performance was also reflected in the retail sector comprising Hardware & Lumber and Courts that have lost 22% over the same period.

Economic Prospects should Improve

The gradual rebound in the construction sector also promises improved domestic income and a general rise in demand for goods and services. Real income should similarly be boosted by the consistent reduction in inflation. Inflation for June 2006 amounted to 1.4%, compared to 1.3% in June, which brought rates to 4.4% and 8.2% for the calendar and point-to-point, respectively.

This represents a significant normalisation in prices, which bodes well for the achievement of GOJ's target of single digit inflation this year.

From this vantage point, long-term investors are presented with a lucrative opportunity to re-position portfolios in order to take advantage of the strong upside potential.

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