Even as the economy improves after the fall-out from the novel coronavirus pandemic, investors have not began to return in droves to the equities market as prices continue to fall with several companies trading at fundamental ‘discounts’.

The Jamaica Stock Exchange (JSE) experienced a flood of new investors in 2019 when the Government of Jamaica divested Wigton Windfarm Limited, interest rates were low, bonds were maturing, and the economy was on a progressive path. This year of change saw 48,167 new Jamaica Central Securities Depository (JCSD) accounts being opened amid the influx of Jamaicans who were beginning to learn about the stock market. Since the pandemic, investors have continued to remain timid with many expressing caution about investing in the market due to their holdings being lower than when they purchased over the last two years.

This has continued to manifest itself in the local equity markets as the main barometer for market performance, JSE Index, remains down one per cent year to date, up 14 per cent since its March 2020 low and down 24 per cent since the start of 2020. In contrast, the Junior Market Index (JMI) is up 27 per cent year to date and 65 per cent higher than its March 2020 low. The JMI set its highest close on November 10 when only three new companies have listed on the market since the pandemic and two migrating to the Main Market. Of the 120 securities listed at the start of 2020, 15 Junior Market companies have surpassed their pre-COVID prices with some setting new all-time highs. Eleven Main Market companies, one US Market company and 12 preference share securities have surpassed their pre-COVID prices. The S&P 500 remains up 24 per cent year to date and 100 per cent higher than its pre-COVID low.

Even with companies shelving their raises or listings and the debt market becoming more expensive from the Bank of Jamaica (BOJ) hiking its policy rates, vice-president of investor relations at GK Capital Management Limited Ryan Strachan believes that the current conditions make it more attractive for companies to raise equity capital. Panjam Investments Limited had shelved its US $100-million additional public offering while Sygnus Credit Investments Limited (SCI), Barita Investments Limited and Derrimon Trading Company Limited have raised billions for expansion to new markets.

“I think the wheels that once turned and caused entities to prefer equity financing to debt will continue to turn. In fact, these days, equity is usually raised not at the expense of debt, but rather as a financing balance that tends to be in the range of 75:25 in favour of equity raises. I do not believe the BOJ policy position will impact that approach,” stated the confident Strachan.

Financial giants NCB Financial Group Limited (NCBFG) and Scotia Group Jamaica Limited have hit multi-year lows in the last two months following the Bank of Jamaica’s (BOJ) decision. SGJ’s 52-week low price of $33.02 hasn’t been seen since November 2016 with NCBFG’s 52 week low of $110 not being seen since August 2018. Even in the financial sector, JMMB Group Limited has the lowest price to earnings ratio of 7.23 times with the rest of the space trading at price to book ratio’s below two excluding outlier companies. In normal times, these would be considered steals by some investors with even Michael Lee Chin’s AIS Barbados Limited spending $2.55 billion in the last quarter to acquire more shares in NCBFG. However, there has been some level of pessimism exhibited in the Main Market as many persons observe how the pandemic will play out.

Although the environment is still riddled with uncertainties, Strachan sees some of these ‘low-priced’ stocks as opportunities for those who focus on dividends. “The discounts strike as a buying opportunity to the extent that the companies pay dividends, for the yields of SGJ, for instance, are trending towards four per cent at current prices. Four per cent is double that of the BOJ base rate.”

SGJ’s dividend payouts have been reduced since the pandemic, but pre-pandemic payouts of $2 each year would result in a dividend yield of 5.70 per cent which is favourable in the current environment. Several companies have continued to improve their nominal dividend payouts and many that suspended dividends in 2020 have returned to their normal payout schedules due to the recovery in business activity.

When asked about the stark difference between the Junior Market and Main Market’s performance, Strachan noted, “The Junior Market appears to have found favour with the retail investor base vs the Main Market which is dominated by institutional players that seldomly trade.”

In NCB Capital Markets most recent weekly research report, it stated, “While the initial expectation was that corporate earnings would take a hit from the restrictions that were implemented by the Government in the September quarter, the current earnings story shows resilience from many companies. This coupled with the busy holiday season is expected to spell good news for corporate earning especially for those companies involved in manufacturing, distribution, and finance in Q4. Furthermore, we anticipate that companies will continue to prioritise cost mitigating strategies and investments to improve the efficiency and resilience of their operations. These factors should buttress corporate earnings for the December quarter.”

— David Rose