GEORGE Soros is known to students of finance and economics as the man who outfoxed the Bank of England in a single currency trade, betting against the pound. In that trade, Soros earned for himself over a billion dollars in the process. He is now immortalised in financial folklore with the now famous moniker “the man who broke the Bank of England”.

Designations of that rank are not handed to just anybody, they are earned. And while Soros is celebrated as a practitioner of the art of investing, like many men in their chosen profession, he was a philosopher of it as well.

In his book ‘The Alchemy of Finance’, he explained that fluctuating exchange rates presented an “existential choice” for all investors, expounding that “one cannot avoid having one’s equity invested in some currency”.

To put it plainly, whether we are receiving rental income from a property, dividends from stock, interest payments from a bond, a salary at the end of the month or profit from an enterprise, we are all investing money and time in a specific currency. To carry that point further, since we are all affected by the value of that currency, we should all be concerned about it.

Jamaica’s Need for Hard Currency

In Jamaica, Soros’ observation becomes even more important. This tiny island nation with its own currency must, as a necessity, import goods and services from overseas for its citizens. Therefore, depreciation of the Jamaican dollar (JMD) will affect local business people, particularly importers, as well as consumers. During 2013, the cost of one US dollar (USD) increased from $92.98 to $106.38, an increase in value of the USD by 14 per cent. During this same year, the Main Market Index of the Jamaica Stock Exchange (JSE) declined 12 per cent. The stock prices of profitable growing companies were declining, under the perceived need for hard currency.

To give an example, ackee and saltfish, the national dish, is generally made with salted cod fish and while cod is in abundance in Northern Europe, it is nowhere to be found in Jamaica. If the JMD depreciates, then the price of salted cod fish in Jamaica will increase.

The depreciation in the value of the JMD creates an element of panic in the currency market, as the anticipation of the rise in value of the foreign currency tends to drive the desire among consumers to buy and hold it. Combined with the regular demand for foreign currency, the elements of supply and demand come into play, where the increased demand leads to a rise in the cost of the foreign currency, and the further decline in the value of the JMD. This can even further lead to the sale of local securities to purchase foreign currency or foreign currency denominated investments.

A Good Investor’s Response

Good investing is part ideology and part independent thought. Studies and history have proven that a sound investing philosophy can be repeated consistently for profit, hence the ideology. Studies have also shown that this philosophy teaches and inspires to sometimes go against the grain, hence the need for independent thought.

The author of the book ‘Common Stocks and Uncommon Profits’, Philip Fisher, explained that “doing what everyone else is doing at the moment and, therefore, what you have an almost irresistible urge to do, is often the wrong thing to do at all”. He was speaking specifically about investing.

For the uninitiated, this practice of investing has a name — contrarian investing. It simply means, trading against the current direction of the market trend: buy when the price is low and sell when the price is high.

The contrarian investor is far from a daredevil or a reckless risk taker. He is, in fact, thoughtful about his choices and a keen observer of the economic conditions, including the implications of Soros’ annotations.

In the context of our local situation, the decline in the stock market follows a select pattern that has been played out in history over time. When there is panic in the streets, men tend to sell their possessions at prices well below what they are worth. The same is true for investing. When there is panic in the market, normal human beings react by selling what they own for less than it is worth.

To the seasoned investor, the current low prices of local stocks is not a reason for grave concern, in fact, it is quite the contrary. It is rather an opportunity to get good stocks at bargain prices.

The Main Market Index of the JSE has a higher average 100 trading day return when the cost of the USD is rising at a rate of about 0.05 per cent versus a decline in the cost of the USD. In short, JMD appreciates.

When the cost of the USD advances at approximately 0.05 per cent, the average rate of increase in the JSE’s Main Market Index is roughly 9.44 per cent. When the JMD appreciates against the USD, the average return was only 5.55 per cent.

The marketplace is mature enough to accept that currency depreciation is to be expected; however, it desires an orderly depreciation.

Recent signs of improvement in the economy and the management of the currency depreciation by the central bank should be encouraging. The announcement from the International Monetary Fund (IMF) that Jamaica reduced public sector debt from 147 per cent of GDP in March 2013 to 140 per cent a year in March 2014 is further encouragement.

The ongoing depreciation of the exchange rate has slowed down when compared to its frantic pace earlier in the year and late last year. With this slower pace of deprecation, if sustained, and it is expected to be sustained, along with other factors in the public and private sectors’ continued improvements, it is not farfetched to presume an increase in investor confidence. This will act as a catalyst for investment in the capital market. This is the result that the contrarian investor anticipates as local stock prices revert upward to their means.

Richard Deane is the Assistant Manager, Research & Special Projects at Mayberry Investments Limited.