Sagicor bets on low interest rates, low inflation and slower depreciation
Rohan Miller, the executive vice-president and chief investment officer for Sagicor Life Jamaica Limited, expects interest rates to maintain a low trajectory over the medium term.
For the current year, with inflation and depreciation of the local currency now moderating, Sagicor expects interest rates to remain closer to seven per cent, Miller told a pension forum on Tuesday.
He credited the two debt swaps done by Jamaica in 2010 and 2013 - the Jamaica Debt Exchange and the National Debt Exchange, respectively - saying they were game changers in keeping interest rates low.
"We have a lot of imported inflation, so when we have devaluation it drives up the price of what we import, number one being oil. Devaluation has gone up slightly but what we must remind ourselves is that there was a major shift in 2013. We had the NDX and the JDX. That change was about breaking the cycle of high interest rates," said Miller.
The swaps replaced Government-issued domestic debt with bonds of longer tenures but lower coupon rates.
"The expectation for us is that devaluation and inflation will be moderated and the impact of that is that we expect interest rates to be subdued," said Miller, who is also CEO of Sagicor Investments Jamaica Limited.
Six to seven per cent rates
"We expect interest rates to be about six to seven per cent. For us, this is good. It's all about where you are coming from and where you are going," he told the forum.
Sagicor, through its Pooled Investment Funds (PIF), is Jamaica's largest private pension fund manager, with $74 billion in funds under management. PIF saw annual returns for 2014 of 24 per cent on international equity holdings; 19 per cent for real estate; 16 per cent for diversified investments, inclusive of local bonds, equity and real estate funds; and 14 per cent for its equity funds. Inflation for the year was in the region of six per cent.
Analysis provided by Sagicor at the annual pensions seminar noted that despite the significant economic shocks over the past two years, inflation remained in single-digit territory. Inflation in 2014 was 6.4 per cent; the dollar depreciated by almost eight per cent, compared to 14 per cent the previous year.
Bank of Jamaica has maintained its policy rate at 5.75 per cent, while treasuries closed the year at 7.14 on the six-month bill.
"The ability to maintain single-digit inflation is partly attributable to the inability of firms to pass on to consumers the impact of the exchange rate depreciation. This resulted in improved efficiency in the agricultural sector," said Sagicor.
Miller said that while investors might be yearning for double-digit annual returns, or even over 20 per cent, those types of deliverables harkened back to times in which interest rates and inflation were also high. Essentially, those returns were a mirage, he argued.
Sagicor, in material provided at the seminar, is estimating that calendar year inflation for 2015 will fall within a range of five to seven per cent; the JMD will depreciate by four to six per cent; and that the six-month T-bill will yield six to seven per cent.
In the bond market, it sees long-term Jamaican bonds trading at nine to 10 per cent; returns from equities on the JSE main index will be around seven to nine per cent; while real estate investments are estimated to return 11 to 13 per cent.