In his opening remarks for the 2019 Jamaica Stock Exchange (JSE) Conference, Jamaica “bond king” Gregory Fisher noted that this will be his 14th year as lead sponsor of the Jamaica Stock Exchange conference, a particular honour as it coincided with the JSE’s 50th anniversary celebration.

Fisher, formerly of Bear Stearns and Oppenheimer, is now part of global investment banking firm Jefferies, which has 4,000 employees worldwide, more than US$11 billion in long-term capital, and is part of the S&P 500.

Looking at the US, Fisher noted that in his speech at the conference last year, he had expressed concern that a new and untested US Federal Reserve Board would likely overtighten like its predecessors that had embarked on interest rate policy normalisation after a major economic expansion, and forecast market volatility.

At the end of last year, the so-called ‘December Massacre’, the S&P 500 was down an epic 13 per cent (the worst December since 1931), with two consecutive months where the US markets declined in excess of seven per cent.

He noted that markets just don’t go up and down 1,000 points at a time in a bull market, and in fact this sort of volatility has always been a characteristic of anything but a bull market.

There have been 13 Fed tightening cycles since the World War II era, and 10 of those periods landed the US into a recession. The other three “soft landings” were just as challenging from an investing perspective. While not predicting an imminent recession, Fisher argues the US stock market is clearly telling the Fed that they are putting this long-winded expansion at risk, just like when new Fed chairman Alan Greenspan in the summer of 1987 tried to flex his anti-inflationary muscles similar to what the current Fed Chairman, Jay Powell, has been trying to do now.

With 90 per cent of the S&P 500 already in correction territory (more than a 10 per cent drop), even if a US recession is avoided in 2019, he argues the US is seeing a growth slowdown.

Consequently, the Fed has now decided to do a 180-degree turn, telling the global investment community that they now might be on “hold” for the foreseeable future. In his experience, when the Fed pauses after a tightening phase, a slowing economy usually follows such a move.

Noting that the “experts” were now comparing today’s US markets to the stock market pullback in 2016, Fisher notes that, contrary to the views of many “experts”, the US stock market correction in 2016 was rooted in two things only – escalating Chinese capital outflows and the associated weak currency along with a plunge in oil prices.

Today, he argues, negative factors are more broadly based and include a slew of domestic issues: numerous US sectors such as the homebuilders, autos, and the financials, are suffering serious setbacks, and monetary policy is tighter now than it was in 2016.

In 2016, the Fed only raised rates one time – a far cry from the recent 275 basis points worth of hikes that we have witnessed recently. The unemployment rate back in 2016 was 4.9 per cent versus the current low of 3.7 per cent. And in 2016, we didn’t have Apple warning the Street about their future earnings picture.

“So no, this is not just like 2016!” Fisher observed.

Instead, 2019 is the beginning of a typical cycle that always follows a massive expansion period. The expansion has lasted so long that many of the investment professionals in the marketplace are too young to have dealt with anything but Fed accommodation.

In his view, the next FED move will be a cut. He argued that while we are probably “months away from that occurring”, nevertheless “rates in America have seen their highs”.

He outlined all the high growth years (1973, 1979, 1990, 2000 and 2007) that preceded a recession to counter the current argument that you “just can’t have a recession or a soft landing in the US with such strong economic growth.”

POSITIVE ON JAMAICA

Fisher was more positive on Jamaica, noting that Jamaican debt is expected to be below 100 per cent of GDP for the first time in over 18 years, unemployment is at an all-time low of 8.4 per cent, with economic growth forecast at 1.5 per cent to 2.0 per cent for this fiscal year, and inflation targeted at the 4-6 per cent level.

Fisher noted that in 2017 Jamaican bonds significantly outperformed the EMBI (Emerging Market Bond Index) benchmark of sovereign debt in a year the index was up sharply. More impressively, in his view, in 2018 Jamaica outperformed the benchmark in a year in which the benchmark was down sharply (the EMBI was down -4.6 per cent last year when the Jamaica sub-index was basically flat).

Referring to any asset that doesn’t go down as sharply when the rest of the index falls as “simply fantastic”, he observed any investor who was overweight in Jamaica actually generated positive “Alpha” over the past two years.

Fisher emphasised that Jamaican sovereign bonds hit another milestone in 2018, trading roughly flat in spread with Trinidad, “a staggering development for those of us who have been following this region for decades”.

Trinidad has historically traded at spreads that were hundreds of basis points (100 basis points equals one per cent) tighter than Jamaica.

While some regional credits have fallen from grace, Jamaica’s credit has continued to improve. He argued it was “shocking“ that the rating agencies had failed to take proper notice of this (Fitch finally upgraded Jamaica yesterday), when only a handful of credits in all of the sovereign world are actually reducing their debt to GDP levels.

For 2019, emerging market spreads are trading at elevated levels to recent history, and with the weakening of the US dollar, Fisher views current levels as very attractive.

Jamaica, with its 10-year spread around 300 basis points above US treasuries, is trading in line with “BB” rated countries. All three of the major rating agencies have indicated a decent chance for a Jamaica upgrade here in 2019, based on “more of the same” from Jamaica: strong fiscal performance, signs of economic growth, and private sector credit growth as the public-sector retreats from its dominance of capital markets, to which Fisher’s only comment was “finally”.