Growth & Jobs | Why stocks make sense now
A low interest rate environment has made the stock market a more appealing option for investors, says Jermaine Deans, deputy general manager at JN Fund Managers Ltd (JNFM).
Jamaicans have grown accustomed to high interest rates, and, by extension, placing funds on fixed-income investments. However, since the subprime meltdown in 2008-09, global interest rates have trended down. Low interest rates are generally viewed as good for the stock market, subject to company valuations. With interest rates being at these low levels, companies have been taking the opportunity to refinance debt obligations via new debt and or equity financing.
"Interest rates in Jamaica have trended down since 2010-2011 when we had the Jamaica Debt Exchange programme, and they continue to trend down now," Deans explained. "And, in this environment, one of the most attractive investments has been the stock market."
The Bank of Jamaica (BOJ) uses the issue of its own certificates of deposit and the purchase or sale of government securities as a major tool to influence the level of liquidity in the financial system, the volume of credit, and, by extension, the level of interest rates.
Deans pointed out that in practice, lower interest rates dictated by the BOJ are normally associated with improved macroeconomic fundamentals in a context of increased liquidity in the financial system, making it easier for businesses to invest, grow, and earn profits.
He noted that the Government of Jamaica's 180-day Treasury bill rates have trended down from 24.45 per cent in December 2008 to 6.13 per cent in July of 2017, a slight uptick from 2016 levels. This uptick is mainly as a result of reduced appetite as opposed to a change in interest rate direction.
"As rates trended down, equity markets have done well," Deans said. "In 2015, the Jamaica Stock Exchange's Main Market appreciated 97.36 per cent, and in 2016, 27.59 per cent. The Junior Market appreciated 160.34 per cent in 2015 and 44.82 per cent in 2016."
This vibrant market accommodated three initial public share offers in July alone, he noted. Members of the public bought shares in Stationery and Office Supplies, Express Catering, and Productive Business Solutions.
Deans was speaking at an investment workshop, mounted by the Jamaica Stock Exchange, JNFM, and the Inter-American Development Bank at the Knutsford Court Hotel in New Kingston recently. He cautioned the prospective shareholders that share prices rise and fall and that investors should be prepared for the long haul.
'Don't invest what you are not prepared to lose'
Jermaine Deans, deputy general manager at JN Fund Managers Ltd, has some sound financial advice about investing on the stock market.
"Don't invest what you are not prepared to lose," he stated. He added: "Don't put your life savings in the market as prices fluctuate. If you are not prepared to lose anything, then perhaps the market might not be the place for you."
Deans said: "If you have done your fundamental analysis and you know a company is sound, but the share price is falling, don't panic. You might even consider buying more shares."
Ramon Small-Ferguson, chief investment strategist and head of research at JNFM, added that, "It is for stock market investors to have a long-term time horizon as share prices move up and down in the short term."
"One critical investment rule is that I don't invest in companies I don't understand," the investment strategist stated. "You will sleep better at night if you understand the factors behind a company's development and the strengths of its management."
It is also useful to build a portfolio of investments in which risk is distributed across different investment classes, Small-Ferguson stated. "Different stocks can appeal to investors based on their preference for those producing greater income or more capital appreciation. And, having a broad range of securities in a portfolio tends to iron out the gyrations in stock market values."
Michael Johnson, senior marketing officer, Jamaica Stock Exchange (JSE), pointed out that the exchange benefited private companies and those investing in them.
"Since 2016, companies listing shares on the Jamaica Stock Exchange have raised more than $12.2 billion," he said.
"They are not borrowing money, therefore, they are not accruing any debt. Instead, they are taking on investors as part owners."
Investors can gain confidence from the fact that the JSE, which is regulated under the Securities Act, is there to protect them, Johnson stated. He added, "We also have a compensation fund, which is an insurance mechanism to protect investors.
"Investors also need information to make good decisions, and we at the JSE provide that information," the JSE representative said. "We provide a structured framework ensuring that Jamaica has a properly run market."