Apr 2006 Financial News

Cautious signs of return to stock vibrancy in Jamaica

Apr 26, 2006

Stock prices, which have been on the decline since the beginning of 2006, appear to have bottomed out more than a week ago, with the apparent return of institutional investors to the market, and an upswing in the volume of trading.

Within the past two weeks, the broad Jamaica Stock Exchange market index has advanced by over six per cent, with a little of that gain being reversed yesterday.
Last week, of the 45 stocks that traded, 27 advanced, four traded firm and four declined.

But a key indicator that to one analyst Adrian Reynolds, senior manager at Capital & Credit Securities Limited suggests that the market may have already bottomed out, is the steady rise in volumes each month since January, and in particular, over the past several trading days.

"Technical indicators at this point, point to the fact that the market had bottomed out three to four days ago," Reynolds told the Business Observer last week Friday.

"The reason why it had actually bottomed out is that the volumes in the market are now increasing and if we look at the monthly average volumes from the start of the year, we would actually see an increase," noted Reynolds . "In January we saw about 3.4 million units (per day), increased to about six million in February, in March we had 7.8 million and in April to date we had roughly 11.2 million units trading."

Vernon James, head of Dehring, Bunting and Golding's (DB&G) stock brokerage arm, says that corporate investors have recently awaken to the fact that prices are low, and have been responding by coming back to the market.

"From what we have seen, there is definitely an increase in institutional activity in the market," says James. "A lot of institutions are in the market trying to buy shares - the situation is that most of these prices are considered bargaining prices."

Those bargain prices were arrived at after the Jamaica Stock Exchange main index plunged 28 per cent over the past 12 months. Stock on average are now trading at price earning ratio of 10.73, from 15 a year ago. The prices are down relative to the earnings of the listed firms.

In fact in this bear market, only four companies out of the 40 that are listed have had a year-to-date price appreciation. These are: Salada Foods, First Caribbean International Bank (JA), Pegasus and Goodyear.

While Reynolds believes that the incipient return of volumes to the market is a prelude to more sustained buoyancy, James points to the potential fall in interest rates as the fuel that will drive this process.

"Once you see volumes start returning to the market, there is more consensus around where consensus should be," notes Reynolds. "People are saying that with stock prices this low, it really does represent a good time for us to get into the market."

Adds James: "The reason behind the demand, apart from the fact that these prices are bargains, is also in anticipation that in the near future you will see a fall in interest rates. It's actually expected to happen sometime within the next two weeks."

John Jackson, financial analyst and publisher of the Investors Choice magazine also reads into some of these numbers, the early signs of a return to a bull market.

"By and large, early indications have been clearly positive," says Jackson. "Low inflation - virtually none for the past four to five months - and corporate profits, while some of them have not been as attractive as they have been before, they are still others that have come out with good results."

Jackson cautions however that the upswing "may or may not be a straight line up". One analyst who remains sceptical about any near-term sustained improvement in stock prices, is Claudette Crooks, director of business development at Today's Money Ltd.

Crooks' argument is that stock prices are fundamentally driven by corporate profits, and that profits will increasingly come under strain because of the continued rise in the price of fuel.

"I wouldn't expect it to be sustainable and the reason is that while the market is at an attractive level and is excellent for long-term buying, the reality is that there is still the issue of the performance of listed companies," said Crooks.

"That I think will hold back the performance (of the stock market) just now. I can't see in an environment with oil above US$72 per barrel moving from around US$60, that this won't have a significant impact on the bottom line of some companies on the exchange."

Added Crooks: "The real driving factor, I believe in stocks moving forward, is at the end of the day, the growth in profitability of the companies...I don't see it in the short-term - between now to September."
But Reynolds' hope is for the interest rate decline - if and when it comes - to counter any impact that oil price increase may have on corporate performance.

"For the most part, (interest) rates have remained stable," he said. "I think that there could be a possible further reduction sometime later down in the year. Right now, I think there could be a downward bias on interest rates. So that in itself is a favourable thing."

In assessing the year-to-date performance of the market, Jackson pointed to what he said was the impact of some large cap stocks on the indices. He cited, for example, the fact that "Supreme Ventures' issue actually dragged down the market somewhat", and that large cap cross-listed stocks had also negatively impacted the market. Among them: NCB, Grace, DB&G, Guardian Holdings, RBTT and Trinidad Cement.

"Some of the major stocks pulled the market down as some investors tried to get out but not on the tremendously high volumes," Jackson told the Business Observer. "I think once it has reached to the bottom, some people (treat) bargains there, and as I understand, institutional investors came into the market and were buying quietly."

Another stock that would have had a big negative impact on the JSE index is Carib Cement, whose price was at one stage cut in half from the beginning of the year - with a huge chunk of the decline following revelation of defective cement on the Jamaican market.

Another factor that DB&G's James cites, as underpinning his expectation of a return to market vibrancy, is the 2006/07 fiscal budget.
"The budget is not expected to be anything worrisome next week Thursday (tomorrow)," he said. "This is building investor confidence in the stock market right now, and that is causing the movements."

Earlier in the month, Finance Minister, Dr Omar Davies tabled in Parliament, expenditure of $358 billion for the current year that begins April 1, a mere three per cent increase over the previous year.

Tomorrow, Davies will reveal how he plans to finance this budget.

Julian Richardson
The Jamaica Observer
Wednesday, April 26, 2006
http://www.jamaicaobserver.com/magazines/Business/html/20060425T160000-0500_103354_OBS_CAUTIOUS_SIGNS_OF_RETURN_TO_STOCK_VIBRANCY_.asp