May 2004 Financial News

What's Going on in Jamaica?

May 20, 2004

Source: Jamaica Gleaner
http://www.jamaica-gleaner.com/gleaner/20040519/business/business1.html
By Andrew Green, Staff reporter

EXPERT OPINION is divided on the prospects for the local stock market, which has lost 9 per cent of its value since the start of May.

One school of thought states that the stock market has paused for the continuation of the rally. The other states that conditions have changed and investors are facing a correction of unknown magnitude.

GOOD PROSPECTS

"Prospects for the market are very good," said Leo Williams, JMMB Securities managing director. He said 12 companies have reported their financial results for the last quarter and these had been generally healthy.

But economist Dr. Omri Evans said the market is now overvalued following the rapid expansion of the index earlier this year. He said, "a correction is expected."

The stock market seemed on a relentless advance until peaking late in April. The Jamaica Stock Exchange (JSE) Index closed on the first day of May at a level of 107,222.14, down 1052.82 points. By yesterday the JSE Index had lost 9 per cent, closing at 97,659.97, down 450.58 points.

One broker, who spoke on condition of anonymity said the market conditions had changed rapidly since the start of the year. He said it now appeared that the United States authorities were set to increase their interest rates and this in turn had spurred a sell-off in global bonds for developing countries.

The sell-off had caused bond prices to fall and this boosted their returns to levels which made them very attractive to local investors. The result was that investors could invest in foreign currency denominated instruments with yields in the range of what they can get on similar local currency investments.

This has brought the Government's policy of lowering interest rates into question, the broker said. In turn, the change in interest rate outlook brings into question the high prices that investors had been prepared to pay for stocks, which had been based on a scenario of falling interest rates.

"It is not that price to earnings ratios (PE) were too high, but they were too low before, based on fundamental analysis," said Mayberry Investment research analyst Kiesa Ansine. She said the current prices were justified by the growing company earnings and the interest rate environment.

NOT LINKED

And Mr. Williams said Jamaica's stock market not closely linked with US stock market, which has suffered significant volatility lately. He said, "With some more analysis and more communication with public, they will get the message that the market is healthy."

But Dr. Evans said the change in the US interest rate environment suggested that the Government will need to switch to a heavier dependence on the domestic borrowing. This, he suggested would tend to push local money market rates up from current levels. As well, Dr. Evans said, the increase in oil prices would impact negatively on inflation, in turn affecting interest rate policies. He said money market investors were now getting a negative return, when inflation was factored into their considerations.

"Rational investors will not behave that way for long," Dr. Evans said of the money market investors. "They will ultimately need to get higher rates or they will find safer and more attractive investment avenues."