Tumbling tickers
JSE lags, broker industry in red as deal flow dries up

After enjoying two recent years as the best-performing stock index in the world, the Jamaica Stock Exchange (JSE) is now among the worst performers in 2023 with trading values at about two-fifths of 2022 highs.

According to countryeconomy.com, the Uzbekistan Composite Index (UCI) is the best-performing stock index in 2023 as it remains up 79.50 per cent year to date (YTD). This is in stark contrast to the Iceland Stock Exchange Main Index (ICEX), which is down 10.54 per cent and is the worst-performing index in 2023.

The JSE Index closed Thursday at 329,820.27 points, a 7.33 YTD per cent decline from 355,896.64 points at the start of the year which makes it among the top-five worst indices in 2023 as it is sandwiched between the KSW Kuwait Index and ADX Abu Dhabi which are down 6.47 per cent and 8.16 per cent, respectively.

The reduction in the JSE Index is reflected in 30 companies on the Main Market being down up to the end of May with 17 increasing so far and Sygnus Credit Investments Limited remaining firm. The JSE Index only saw $1.71 billion in value traded in May which is 41 per cent of the $4.15 billion traded in May 2022. If one goes back to even April, there was only $1.46 billion in value traded compared to $6.14 billion in April 2022. There is 54 per cent less value traded in the first five month of 2023 than that of 2022.

The JSE Index is among the worst-performing global indices in 2023.

If one goes back as far as May 2018, there was $8.68 billion in value traded during that month when the JSE Index was at 296,345.31 points. The current JSE Index value is lower than the COVID-19 lows seen in 2020 and extends back to August 2018 which was one of the years when the JSE Index was one of the best performing.

"The higher interest rate environment also caused investors to demand a higher required return for stocks, which means that companies' future cash flows were significantly discounted, lowering the valuation for most stocks. While the ongoing economic recovery augurs well for the sector, these gains have been weakened by headwinds impacting the operating and financial environment," said a recent NCB Capital Markets weekly guide on that of the financial sector stocks which are largely down in 2023.

This has resulted in Trinidad-based Massy Holdings Limited being the most valuable company on the JSE with a market capitalisation of $199.56 billion compared to Sagicor Group Jamaica Limited which has a market capitalisation of $189.89 billion.

While the Junior Market Index saw April outperform the prior year, every other month is lower than the previous year with only March being the other month to surpass $1 billion in value traded. 19 Junior Market companies were up at the end of May with 28 being down in the period.

The headquarters of the Jamaica Stock Exchange.

This reduction in value traded on the JSE has corresponded to the JSE itself seeing a drop in income earned. The JSE's consolidated cess income was down 44 per cent to $72.31 million for the first quarter as the stock exchange earned less on market trades. The JSE earns 0.35 per cent on every trade executed on the market.

While the JSE is planning to introduce short selling over the next two years along with a raft of other initiatives, the high interest rate environment is likely to continue to stifle the stock market which has gone the first five months of the year without a public market offer such as an initial public offering. The JSE had a direct market access session recently under its phase 2 initiative where Barita Investments Limited and Cumax Wealth Management Limited were listed as brokers that interested investors could contact to access international markets. However, the recent outages being experienced on the JTraderPro platform have overshadowed some recent announcements.

"Furthermore, higher market interest rates will keep financing costs for corporates elevated and depress business investment. Additionally, a weak economy could mean a reduction in demand from consumers and slower growth or even a decline in corporate earnings. Companies with weak fundamentals and strategies will see their prices fall further," the NCBCM report added.

Brokers in red

The market softness has also spilled over to brokers who have seen more fair value losses on their books, reduced trading opportunities, lower management fees and higher cost of financing in the current economic environment. This was evident in the recent quarterly financials of several financial companies who reported reduced earnings for their wealth management or brokerage businesses.

Sagicor Group Jamaica Limited mentioned in its first quarter report that its investment banking segment, which includes Sagicor Investments Jamaica Limited, had a $70.36 million loss relative to the $308.22 million profit in the prior period. The underperformance was blamed on increased funding costs which reduced net interest margins.

VM Investments Limited, which has its wholly owned subsidiary VM Wealth Management Limited, reported improved net interest and other operating revenue of $439.52 million, but had an operating loss of $5.25 million. Its share of associate profit from Kingston Properties Limited pushed its net profit up 41 per cent to $19.92 million.

Barita Investments Limited saw a sharp cut in its net interest income by 75 per cent to $139.48 million in their second quarter with a significant part of their net operating income coming from gains on their exposure to the Barita Real Estate Portfolio Fund. Mayberry Investments Limited incurred a net interest loss of $35.32 million in the first quarter relative to $75.47 million in net interest income in the prior period. This loss was driven by a one-time interest expense of $38 million related to their bond offering where they raised $6.4 billion.

"Conversely, our Jamaican investment business, GK Capital Management Limited (GK Capital), recorded a decline in revenue and profitability. This was primarily attributed to unrealised gains recorded in the prior year period associated with the execution of two IPOs by GK Capital, which contrasts with the first quarter of 2023, when these gains did not recur. GK Capital has also been negatively impacted by the below par performance of Jamaica's equity market," the GraceKennedy first quarter report stated about GK Capital.

However, during the period, GK Capital received $156.63 million from the GK Financial Group after selling its shares in Key Insurance Company at $3.50 on March 29. This will help bolster the capital base of the broker as many financial firms tighten their belts to ensure they remain in compliance with capital requirements.

One broker this week announced ten layoffs with other brokers also trimming their staff base and seeking to consolidate operations to cut down on costs. Other industry members have mentioned that the industry is seeing red as things remain tough in the sector. While some brokers are looking forward to greater opportunities in the second half of 2023, the US Federal Reserve and Bank of Jamaica raising rates can continue to diminish investor interest in some of the products and services they might have to offer.

The market also took a hit in confidence following the allegations at Stocks and Securities Limited in January which has continued to play out in the courts with Boost Financial Services in court with them yesterday. SSL clients continue to remain in limbo as the Financial Services Commission continues to process approvals for any transaction for SSL clients which includes moving their stock portfolio to other brokers. This effectively means that SSL portfolios are not on the JSE right now.

Also, the Play Ransomware Group left a comment on the Mayberry breach stating, "Private and confidential data, clients and employee documents, finance, taxes and etc. For now, partially published compressed 5GB. If there [is] no reaction, full dump will be uploaded."

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