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Are you ready for risk?
<p>ATHENS, Greece -- Caretaker Prime Minister Vassiliki Thanou takespart a swearing in ceremony at the Presidential Palace in Athens, onFriday. Greece's new caretaker government, led by the nation's firstfemale prime minister, was sworn in Friday as the country heads to earlyelections next month, the third time Greeks will go to the polls thisyear. (PHOTO: AP)</p>
Business
With Pamela Lewis  
August 29, 2015

Are you ready for risk?

The Sterling Report

Lately, our columns have been replete with dealing with the topic of risk. The truth is that globally we have been operating in an extremely risk-prone economic and financial environment, in more recent times; so much so that the term “risk-free” is virtually no longer in common use.

As interest rates in Jamaica appear to be eyeing a downward trajectory, investors are beginning to feel the “risk-on” urge. But as a seasoned financial advisor, my advice to investors would be to tread cautiously at this time. This is not a time for the faint-hearted; the market is very rocky, to say the least. You could buy a double-A bond today and tomorrow you could watch it fizzle before your eyes.

In the once hallowed halls of the AAA to BBB- investment grade credits, one once felt comfortable making such purchases. Not so today. One has to apply some measure of caution when purchasing.

The fact is that a number of these investment grade instruments have seen their credit rating being eroded to speculative and sometimes junk status. One example that comes readily to mind is a Barbadian sovereign bond. This tiny Caribbean island boasted an enviable credit rating of Ba3 by Moody’s, one of the highest investment grade ratings possible. But by June 2014, Barbados saw its credit cut to B3, or junk.

The rating agency cited “negative” fiscal trends as the culprit; but the real culprit was the worsening global economic climate.

Other sovereign credits have also felt the effects of the ongoing economic crisis. Puerto Rico, for example, also recently defaulted on its debt. Across the global landscape China, Europe, Brazil, Puerto Rico, Venezuela, Mexico, USA, all are experiencing severe economic problems. Even the formidable Canada is now experiencing a taste of low growth, with a possible recession lurking in the oil fields/shadows.

However, this situation is not unique to sovereign issues. Companies across the globe have also found the global economic conditions difficult to weather, and they have been feeling it on their bottom lines. Some companies flat out defaulted — like CEAGRO, in Brazil. During the past two years, this Brazilian bond was all the rage; today the bond is no more, the company having defaulted on the debt.

Another company which has been taking a beating is PDVSA. This is a company in Venezuela which is involved in the oil industry. As oil prices experience the lowest levels they have ever been in the past eight years, they drag all the associated oil companies along with them in their downward spiral.

Financial institutions’ bonds are also taking a battering as the fallout from the other various industries affect the bottom lines of these institutions, through their interconnectivity.

This is the context in which financial advisors have to advise their clients on how to effectively manage their hard-earned funds, so that they can realise the best returns while minimising any potential losses.

As financial advisors, we do not always get it right, but neither does George Soros, or for that matter, Warren Buffet! It really has become a tough market. Gregory Fisher, Managing Director at Oppenheimer & Co. Inc. in the USA, constantly writes that in all his 31 years in the financial arena, he has never seen volatility like this before.

So what is the reason for telling you all of the above? I would like to suggest to investors that now is not the time to become entangled with risk. I suggest that investors delay their bond-purchasing habits for a while until the market recovers; play it safe by investing in short-term instruments, like repos, so that one can take advantage of the bargains when they present themselves.

This is not to say that if one finds a creditable investment that one should ignore it; for example, two weeks ago, a Sagicor bond came on the market, paying interest at 8.87 per cent per annum. This bond is expected to trade with very little volatility and the price should continue to rise. This has paid off so far for those who were able to participate.

Crises do not last forever; as a matter of fact, market volatility is what allows investors to make significant gains, as investors scoop up good credits at low prices. This is the essence of bargain-hunting; and that time will come around again soon. But tread with caution when taking on risk at this time.

Pamela Lewis is vice-president, investments and client services at Sterling Asset Management Ltd. Sterling provides financial and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm

Barbados has seen its<br />credit cut to B3 by Moody&rsquo;s

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