Without a doubt, the past year and a half has been a struggle for the local stock market. Even now, volumes are approximately 70 per cent below early 2008 levels and the JSE Main Index has hovered around 80,000 points compared with more than 110,000 points two years ago. However, that picture has already begun to change as a more bullish equity market appears to be on the horizon.

The optimistic outlook is stemming from a number of elements, but there are three key factors that should be taken into account. The first involves interest rates, which have been on a clear downward trajectory. Last week’s Treasury Bill Auction (held on Wednesday, February 24, 2010) produced an average yield of 11.01 per cent for the 180-day T-Bill – a stark shift from the highs seen fifteen months ago. In December 2008, the average yield for the 180-day T-Bill was 24.45 per cent, and just two months ago the average yield was 16.80 per cent.

Lower interest rates will make the return from equity investing more competitive than it has been over the past year. That is, from late 2008 to mid-2009, with investors being offered exceptionally high returns on their money for less risky government paper, they did not have much of an incentive to hold stocks – but now they do. Moreover, if the taxation applied to these instruments is taken into account, the realized return is actually closer to eight per cent, increasing the attractiveness of equities.

Increased traffic on the equity market will have a spillover effect. As investors flow into the stock market, boosting demand on the Jamaica Stock Exchange (JSE), share prices will rise, pushing up Price to Earnings (P/E) Ratios assuming earnings remain constant. With JSE-listed Companies currently trading between 5-6 times earnings, P/Es have already begun to adjust upwards and could range between 9-11 times by the end of the year. For example, Seprod Ltd’s P/E stands at 7.23 times compared with 5.33 times on November 10, 2009.

A third factor that should not be underestimated is the returning of confidence to the market and the overall economy. The recent steps taken by the Government of Jamaica to help propel the economy, including the Jamaica Debt Exchange (JDX) Programme and multilateral financing agreements, present a great opportunity for Jamaica, and this has not gone unnoticed. In fact, the country has already had its credit ratings revised upwards by both Fitch Ratings and Standard & Poor’s (S&P).

On February 16, 2010, Fitch upgraded Jamaica’s long-term foreign and local currency ratings to “B-” from “CCC” and “C” respectively, with a stable outlook. S&P followed a week later, boosting its long-term foreign and local currency sovereign credit rating on Jamaica to “B-” from “SD” or “Selective Default” with a stable outlook.

Given the aforementioned factors, there is a clear opportunity to take a second look at equities and some investors have already begun to jump in. Consequently, stocks like Jamaica Broilers Group Ltd (JBG), Pan-Jamaican Investment Trust Ltd (PJAM), First Jamaica Investments Ltd (FJI), and Seprod Ltd (SEP) have all hit 52-week highs recently as demand for blue-chip stocks on the JSE is up substantially. In fact, the JSE Market Index climbed 5.23 per cent last month to close at 79,094.75.

At the same time, although most will agree that the prospects for the Jamaican economy are looking up, the fact still remains that the country is not out of the woods yet. As such, investors should continue to focus on Companies that have proven themselves time and time again. Companies such as GraceKennedy Ltd (GK), Scotia Group Jamaica Ltd (SGJ) and Jamaica Broilers Group Ltd (JBG) are great examples.

In the case of GK, the Company recently posted profits that were up 54 per cent over the prior year. If the figures are adjusted to exclude the impact of the one-off expense related to the trading irregularities at the subsidiary, First Global Bank (FGB), pre-tax earnings were still 32 per cent higher. The Conglomerate is well-positioned to withstand the reduced yields on GOJ instruments that will have the biggest effect on its Banking & Investments division as its Food Trading and Money Services segments continue to perform exceptionally well.

Scotia Group Jamaica Ltd (SGJ) is another stock pick. For YE 2009 ended October 31, the Company, which has historically been the most profitable Company on the JSE, posted its thirteenth consecutive year of increased earnings. Its recently reported first quarter earnings were also up 10 per cent. Also worth mentioning, is the fact that SGJ is better positioned to weather the reduction in interest rates as its interest income from securities as a proportion of total interest income is less than that of industry rivals.

Finally, Jamaica Broilers Group Ltd (JBG) is another stock investors should keep their eyes on. The Group is reaping the benefits from the expansion of its ethanol plant to 120 million gallons per year. As economies rebound, fueling demand for energy, prices for the global transportation industry’s most widely used biofuel will climb. The performances from JBG’s Poulty and Feed & Farm Supplies segments are nothing to scuff at either. In JBG’s most recent results, both divisions made significant headway, with the core Poultry segment more than doubling profits to $456 million and Feed & Farm Supplies earning $420 million versus $193 million in the prior year.

Of note, since the start of the year, JBG has hit six new 52-week highs. Its current 52-week high is $5.95, recorded on February 15, 2010. Based on Monday’s close of $5.56, JBG is trading at 4.41 times earnings, compared with 3.94 times on December 14, 2009. With the strong performances being recorded at JB Ethanol and its other units, the outlook for the stock is positive.

As Jamaica’s economic landscape takes a turn for the better, so too will the equities market. The expectation is that a lower interest rate environment coupled with improved economic fundamentals will continue to fuel the renewed interest in local equities. SSL urges investors to take positions in local blue chip Companies now while the opportunity knocks.

Shari DaCosta is Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com.