With the new year off to a seemingly fast start, investors are eager to find ways to identify areas of potential gain.

Sterling Asset Management, in their latest Virtual Investor Forum, Eugene Stanley –VP Fixed Income and Foreign Exchange and Dwayne Neil, AVP, Personal Financial Planning, joined moderator Marian Ross in helping to guide investors through the main opportunities for making more on their portfolios in 2021, as well as the challenges.

While acknowledging the conventional lean towards bonds, repurchase agreements and other similar fixed income instruments, the Sterling advisors noted that interest rates and yields on these instruments have been on the decline.

They offered as a potential alternative structured notes, which are debt instruments issued by a large investment grade rated financial institutions (eg, JP Morgan or Credit Suisse) that pay interest only on the condition that specific equities (or other underlying assets) retain a specified value.

“People who have a greater risk appetite and are seeking higher income levels may find that a structured note is a more rewarding option,” Stanley said. “For example, the structured note may pay interest of nine per cent as long as the stock price for any of the following stocks (say Apple, Goldman Sachs and Exxon) does not fall by more than 50 per cent.”

Clarifying further, Neil offered: “The issuer will not be obligated to make an interest payment if any of these stocks decline by more than 50 per cent and this will hold for the period in which the stock price is depressed. Once the stock price rebounds, if the overall fall is less than the stipulated 50 per cent, and the other stocks remain within the 50 per cent limit, then the issuer will resume making payments.”

The panel emphasised the importance of having a full understanding of the stock, how it normally trades and any possible impact on the price due to current or projected market. Even with coupons on equity structures ranging anywhere from six per cent to an excess of 20 per cent, the panel cautioned that the instruments were not for everyone, and were in fact, best suited to buy-and-hold investors, as little or no secondary market exists for them. Also, they attract minimum investments of US$50,000 -US$100,000.

As a rule, for investors considering bonds, Neil emphasised the importance of first determining how much one has for investing, the level of risk tolerance, and the level of income one will determine as acceptable or ‘good.’ He also sought to discourage investors from focusing on price, noting that the return already takes the price into account. He also debunked the myth that bond interest rates are ‘too low’ to offer considerable returns, saying there were ‘pockets of value’ in the market while noting that investors have also voiced concerns about the potential negative impacts of a return to a more inflationary economy.

While acknowledging the inverse relationship between bonds and inflation, Stanley indicated that income/cash flows, particularly for buy-and-hold investors, will not be affected by price movements. “Your periodic fixed coupon payments will remain the same regardless of price declines and the face value of your bond will be repaid in full at maturity — provided the issuer does not default.”

The panellists also highlighted mutual funds as a potential growth area, with multiple opportunities. Neil recommends that investors allow a professional portfolio manager to take advantage of opportunities and invest in a managed fund. The outlook, he said, was less bullish in relation to local equities, which ended 2020 in a bear market (declining 22.4 per cent in 2020), in sharp contrast not only to rebounding international equities, but also relative to the spectacular performances of the local equities market prior to the pandemic.

The Sterling forum panellists offered that COVID-19-related restrictions will continue to impact overall economic activity negatively and that the Bank of Jamaica’s (BOJ) liquidity-mopping exercise in response to foreign exchange volatility is therefore likely to hinder equity performance for 2021, as year-to-date the main Jamaica Stock Exchange (JSE) market has fallen three per cent.

In addition, Stanley stated that the exchange rate continues to be the major concern — what is happening — when is the best time to buy and sell.

“The BOJ report showed that Jamaican dollar devalued by 7.6 per cent for 2020, or double what it did in 2019, an outcome largely attributable to the pandemic effect, particularly on the tourism sector. Overall, the year saw periods of appreciation, following a precipitous dip in January, largely driven by the intervention of BOJ and other players. Overall, the expectation is for the Jamaican dollar to finish 2021 lower, given the continued impact of COVID-19 on the tourism sector, with travel restrictions resulting in lower inflows (compounded by the initial slow roll-out of vaccines in the US and Europe),” Stanley said.