2018 investment outlook… lower risk = lower returns
For investors the 2018 outlook could be extremely great or extremely average depending on the approach one decides to take. 2017 was a great year for people who decided to invest in the Jamaica Stock Exchange (JSE) through initial public offers (IPOs) and the market in general as it was a case where a rising tide lifted all boats.
So for people seeking to repeat the good times into 2018, the research team at JN Fund Managers tell a tale of caution as they believe 2018 will be a year where there will be investments that are outright winners and other investments that will be just average.
According to Ramon Small Ferguson, head of JNFM’s research team, “Broadly, we believe the local financial markets will likely be characterised by lower returns in 2018 relative to recent years due to the lower perceived risk created by Jamaica’s new-found economic stability.”
Essentially, early investors have already priced in the expected gains from a more stable economy and stable currency. And so Small Ferguson notes that there are two key themes that underpin our 2018 local investment outlook:
• Unpredictable local foreign exchange market: Over the next year, we anticipate that the Jamaican dollar will be characterised by two-way volatility versus its major trading counterparts, particularly the US dollar. We expect the exchange rate to be influenced more by fundamental factors such as supply and demand and the state of key economic indicators, such as the country’s balance of payments and rate of inflation as opposed to speculative trading.
• Increased private capital market activity: We believe declining local interest rates driven by low inflation, the expansionary monetary policy stance of the Bank of Jamaica (BOJ) and the reduced funding needs of the Government of Jamaica (GOJ) will continue to support a favourable environment for companies to raise capital in 2018. We believe this environment will also be supportive of increased Mergers & Acquisition (M&A) activity in public and private markets.
Caution: Rising oil prices…
He continues, “We are of the view that the primary risk to the aforementioned themes would be a sharp rise in oil prices. Since 2014, Jamaica has benefited considerably from the sharp decline experienced in oil prices globally, which has resulted in a significant narrowing in the country’s current account deficit (CAD) due to lower import costs. Local inflation has also been positively impacted, following the same downward trend as the CAD during the period, while the country has managed to accumulate a sizeable net international reserves (NIR) position. For the calendar years 2015 and 2016, Jamaica’s net foreign direct investments actually exceeded the CADs resulting in a surplus of foreign currency in the local financial system. This phenomenon has contributed materially to the resilience of the Jamaican dollar while the resulting decline in inflation has also supported the declining interest rate environment.”
2018 EQUITY MARKET OUTLOOK
In terms of the JSE, Small Ferguson notes, “We believe that investors in the local equity markets will continue to benefit from a number of new companies seeking to list on the stock exchange in 2018 driven by the favourable investment landscape.”
That said, Small Ferguson doesn’t see 2018 as a case where all the stocks will rise and give spectular returns. In fact, he is of the view that it will be a stock pickers market.
“We think these listings may lead investors to rebalance their portfolios by moving out of legacy names into these new opportunities. We encourage investors to take the opinions of various market participants into account when making the decision to invest in new listings, as all listings will not be created equal.”
Now Small Ferguson notes that over the next year, it is expected that there will be a continuation in the uptrend of the local equity market supported by:
1. Modest increases in earnings of listed companies
2. Potential M&A activity
3. The surplus of un-invested capital that resides particularly in institutional investment portfolios.
“We believe the rise in the local equity market in 2018 will, however, be more modest than the returns experienced in 2017. We also recommend that investors invest in a diversified portfolio of local equities versus taking singular bets, as we expect that returns across listed companies will display increased variability in 2018.”
2018 FIXED INCOME MARKET OUTLOOK
Now not everyone wants to risk their money in the market. So for more conservative fixed income investors, Small Ferguson notes, “In 2018, we believe that the local fixed income market will be characterised by relatively lower interest rates; an increasing number of corporate bond issuances; and a decreasing number of issuances by the GOJ. We think the low local interest rate environment should continue to be supported by both monetary and fiscal policy directions in 2018. As we mentioned before, we think the key near-term risk to our forecast for local interest rates is a sharp rise in inflation resulting from higher oil prices.”
And investors may just find opportunities from the same local companies that are on the JSE that also offer debt options.
“Increased activity in the local private debt markets will present investors with a myriad of new opportunities to reduce portfolio risk through diversification. While we anticipate a trend of increased participation of retail investors in private debt markets in 2018, we believe smaller investors would be best served gaining exposure to this asset class through investing in collective investment schemes such as fixed income mutual funds.”