LACK of liquidity and less-than-stellar company earnings have been blamed for the widely perceived underperformance of the local stock market since the advent of the Jamaica Debt Exchange (JDX).

With the February 24, 2010 JDX, the average yield on Government of Jamaica (GOJ) Jamaican-dollar denominated bonds fell to 12 per cent from 19 per cent. And with the rates on fixed income low and unattractive, the appetite for equities was widely expected to increase significantly and lead to an equally significant increase in prices.

Over the 16 months to Monday the main Jamaica Stock Exchange (JSE) index has gained 13 per cent since the debt swap, with 25 stocks advancing and 13 declining over the period, but has fell short of the lofty expectations.

Money Masters president Claudette Crooks suggested last week that some investors were expecting too much positives from just one factor — interest rates.

“For any stock market to have sustainable market performance in terms of an upward trend you need to look at other factors; that’s just one factor,” Crooks said, speaking at a Mona School of Business seminar at the University of the West Indies.

She noted that a contributing factor to the vibrancy of any stock market is how listed companies perform year over year, which has been lukewarm on the JSE over the period.

“The critical factor for that to occur is economic growth because the growth within an economy is a function of the individual companies within the economy,” explained the Money Masters boss.

Kimberly Thelwell, leading research analyst at Stocks and Securities Limited (SSL), concurred.

“A critical component of stock market demand continues to be earnings performance. The JSE main market companies have not been reporting consistently positive nor strong earnings reports over the past several quarters,” Thelwell told the Business Observer yesterday.

“Moreover, negative news reports surrounding companies such as Cable & Wireless (Jamaica) Ltd, Caribbean Cement Co and others continues to affect investors’ outlook and purchases on a whole,” she noted.

Additionally, the SSL executive said that another important factor for growth in an equities market is discretionary income, largely squeezed out of the pockets of local investors.

“While interest rates are at a 40-year low, the current economic climate remains challenging. As a result, disposal income remains strained and consequently the funds available for purchasing stocks is limited,” she explained.

Supporting Thelwell’s assessment is the fact that market volume, a gauge for measuring levels of investor sentiment, has been low. The value of shares traded since the JDX was $19.1 billion or just over $1 billion per month up to the end of May 2011. To put that into context, the value of shares traded totalled some $77 billion in 2008 alone at the onset of the global recession.

Financial analyst Dennis Chung was one who didn’t expect much from the stock market post-JDX and he notes that he has been proven correct.

“The fact is that people buy stocks based on value, profit, performance etc,” explained Chung, noting “The reason why persons were saying that the stock market would go up with the JDX is because, in normal times, when the economy is doing well, persons are shifting money from one earnings share into the next.

“But if it isn’t earning, then you just keep the money in cash, it’s the logical thing to me and that’s why I couldn’t understand why some analysts said that the stock market would perform after the JDX,” he argued.

However, all three analysts see some positives in the current environment.

On one hand, Thelwell noted that the JSE Junior market has been performing strongly as small and medium-sized companies raise capital to achieve their growth strategies.

And both Crooks and Chung, while pointing at GraceKennedy, said there are positive indicators that demand for goods and services is increasing.

“If you speak to the parties at GraceKennedy, for example, they will tell you that they are seeing an increase in the demand for basic goods and services… if that spreads and come January 2012, a lot of the measures that are proposed in the tax reform are actually implemented, then consumers will have the capacity to spend,” said Crooks, advising opportunistic investors to “…watch what happens in terms of GDP performance and position about July, August or even now”.

Added Chung: “I think the economy is going to start turning around because with all the money out there in terms of the JDIP (Jamaica Development Infrastructure Programme) and elections coming up, a lot more spending will take place.”