Forex gains, strong bond market propel Sterling to record profit
Sterling Investments Limited, SIL, doubled profit from $53 million to $101 million last year, a record for the company that its operational head, Charles Ross, intends to better this year.
It comes amid a doubling of foreign exchange earnings for the boutique firm, whose main business line is bond trading.
“We do expect to top that next year because the trends in terms of the bond markets have continued, in that bonds have remained strong since the start of this year,” Ross said of the company’s earnings expectations for 2020.
Sterling Investment’s foreign exchange gains increased by 91 per cent to $43.9 million, amid accelerated depreciation of the Jamaican currency. The JMD fell $4.85 or 3.8 per cent for the 12-month period ended December 2019, relative to the same period in 2018 when it depreciated by $2.72 or 2.2 per cent, Sterling said in its newly released earnings report.
As for the volatility in the forex market, Ross notes that while the depreciation of the local currency represents an opportunity for financial institutions to make money, it doesn’t help exporters who have to earn foreign exchange.
“These fluctuations make it difficult for real sector companies but they do provide opportunities for financial institutions to realise significant profits from the activity; but what is intrinsically driving it, I don’t know,” said Ross, president and CEO of Sterling Asset Management Limited, which is the management company for SIL.
He noted that the central bank detected a shortage in the market in the past quarter, in that institutions had sold a lot more USD than they bought, and that the covering of those positions at the start of the year led to a rapid depreciation in the local currency.
The JMD has recovered somewhat since then and is now trading at around $136, as against a peak of $142 last year.
“What we saw in February is a reversal of that, in other words a resumption of the short selling, which has resulted somewhat in the exchange rate appreciation,” Ross said.
He warned, however, that those positions have to be covered at some point, and so the JMD was likely to depreciate once more.
“There are one or two players who tend to affect the market when they go short, but I don’t know where it’s going to end; when things are going to settle down,” Ross said.
“There is huge short selling in the market behind that and we don’t think that it is sustainable over the medium to long term,” he added.
Sterling Investments is heavily invested in fixed income and equity investments across the globe, but Ross says over 95 per cent of the total portfolio are held in bonds.
The rise in global asset prices, in USD terms, led to a rise in SIL’s comprehensive income to $211 million, from a loss of $21.7 million booked in 2018.
“We expect the portfolio to continue to do well, both from the standpoint of the intrinsic value of the securities and moderate upward movement in exchange rates,” he said.
“Even though the coronavirus is throwing a bit of cold water on the markets, we expect that to be transitory. We note that the Fed is responding vigorously by cutting interest rates,” Ross said, arguing that rate cuts are in SIL’s favour.
The US Federal Reserve, which is that country’s central bank, announced a half-point cut in interest rates on Tuesday to help ameliorate the downward pressure on the stock market brought on by fears that COVID-19 could depress global growth.
US stocks initially rose after the announcement but later changed course and returned to red.
However, the rate cut served to rally the bond market with yields falling below one per cent. Yields fall when bond prices rise.
“Lower interest rates tend to have a positive effect on bond prices. With this rise we see a knock-on effect on the portfolio, which means we can realise capital gains when we take advantage of the opportunities to trade,” Ross said.
For 2020, SIL plans to rebalance its portfolio somewhat by growing its equity holdings to 10 per cent.
“We’ve been broadening the range of securities that we invest in and we’re looking a little more at equities, and so we’re strengthening our analytical capabilities regarding the local market,” Ross said.