Mar 2017 Financial News

US-dollar investment pinch affects Jamaican stock market

Mar 08, 2017

Restrictions placed by the regulators on some large investors — such as pension funds and insurance companies — on investments in US dollar-denominated assets, are having a cooling effect on new products already introduced and some planned by the Jamaica Stock Market (JSE).

General Manager of the JSE, Marlene Street Forrest, told the Jamaica Observer that a major impediment in the roll-out of new products is concentrated around their possible impact on the movement of foreign exchange.

“The JSE does have some way to go in providing the number of products and services that are offered by many of the leading global exchanges. Obviously we are trying to increase the offerings to the market so that investors have greater options and access to different investment instruments and related services.

[However],“…where brokers and other market players are restricted from participating by any of the country’s regulators, then the value proposition for the products launched or to be launched would be extremely diminished. We have seen the impact on the US dollar-denominated market and most recently the depositary receipt product which is not yet introduced,” said the stock exchange head.

A depositary receipt is a negotiable financial instrument issued by a brokerage house or a member dealer to represent a foreign company’s publicly traded securities. It trades on a local stock exchange, and was set for roll-out on the JSE in October 2016.

The depositary receipts facilitate the buying of shares in foreign companies. This means that shares of companies that are listed on exchanges such as the New York and London Stock Exchanges, for example, can be traded on the JSE without actually being listed on the JSE.

On Tuesday the Bank of Jamaica (BOJ) indicated that, for the time being, it will not allow institutional investors access to the depository securities market, as it is wary of the impact that large purchases of the securities might have on the exchange rate.

Pension funds and insurance companies which are limited to five per cent of assets invested in foreign securities might buy the product in Jamaican dollars, but the dealer who is purchasing the securities overseas would have to find foreign exchange to complete the deal, explained BOJ senior deputy governor John Robinson.

The BOJ, he added, is committed to maintaining orderly conditions in the foreign exchange market, and as such it will continue to place the depositary receipt market and the US dollar-denominated securities accessible by institutional investors under review.

Pension funds and insurance companies have more than $500 billion in assets, much of it in search of new targets for investment every year.

“Opening the market to such companies might result in a heavy increase in demand for the US dollar. Whoever is doing the deal would have to convert to foreign currency in order to buy the equities abroad,” Robinson explained.

The BOJ has been waging a sustained campaign for order in the forex market, selling billions of US dollars into the market to meet demand and control currency movements; and more recently, adjusting upwards the reserve requirement of deposit takers to serve as a disincentive for holding funds in US dollars.

For the same reasons, it appears to be leading to a stillbirth new sources of foreign currency demand which might negatively affect its programme.

Other sources told the Business Observer that there is also a restriction on companies floating an IPO in US dollars because of the need to protect the Jamaican dollar.

Approval for such initiatives is required from the BOJ. The consequence has been that some companies have sought to be listed by introduction, instead of via an IPO where new funds are raised.

Street Forrest said that as regards the depositary receipt market, the regulations are in place, but section 22 of the Bank of Jamaica Act prevents quite a number of firms from having a good value proposition for brokers.

Pension funds and insurance companies, listed among the island’s largest investors, are for the time being limited to having five per cent of their holdings in foreign securities.

When questioned about the restriction by the Business Observer in late 2016, Governor of the BOJ Brian Wynter said that the focus would remain on educating the market and that the pension funds issue would be dealt with at a later date.

BOJ senior deputy governor John Robinson said yesterday that brokers who can invest as much as 25 per cent of their assets in foreign securities have not been complaining.

Attempts by the Business Observer to get feedback from the Jamaica Securities Dealers Association (JSDA) did not succeed, as the President was unavailable up to press time. However, he promised to follow up.

Other challenges involved in the new product roll-out, said Street Forrest, is the fact that “development takes time to ensure that we get it right by putting in place all the necessary safeguards for the investing public. There is also the need for stakeholder feedback and engagement.”

The JSE is pondering a range of new products. The objective is to introduce products for diversification of investors’ portfolios; to improve portfolio value and afford the integration of global assets within the mix, the JSE head outlined.

Street Forrest said development of products requires the input of the various stakeholders “including the investors, the brokers, our attorneys to assist with rule making and our regulators, which includes those to whom we directly report and others that may have a stake in the impact of any product or service on macro-economic stability, growth and development.”

She concluded, “We continue to lobby where necessary and press along despite the challenges. We believe that it is important to pave the way, put in the plumbing for a developed market, and in time we will have reaped the benefit of those activities.”

 

Source:
BY AVIA COLLINDER
collindera@jamaicaobserver.com
Business reporter
Jamaica Observer
Wednesday March 8, 2017    

http://www.jamaicaobserver.com/business/US-dollar-investment-pinch-affects-Jamaican-stock-market_91759