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Stabroek News

Macroeconomic stability is not sufficient for boom in stock market and economy
published: Sunday | January 21, 2007


In his opening night speech for the Jamaica Stock Exchange second regional conference on Investment and Capital Markets held at the Ritz Carlton last week, Finance Minister Omar Davies stressed Jamaica's positive-macro environment, as shown by our single digit inflation (5.2 per cent), government interest rates at their lowest level in 20 years, stable ratings from the international rating agencies and a stable exchange rate.

With respect to the stable currency, whilst it is true that the Jamaican currency depreciated only 4 per cent last year against the U.S. dollar, much of the depreciation occurred in the last quarter, and the currency has already lost another half of one per cent since the beginning of the year, so on annualised basis the recent fall in the exchange rate has been much higher than that experienced for most of last year.

At first glance, the faster fall in the dollar is surprising in view of the reported bumper tourism season and continued heavy foreign direct investment, particularly in tourism. The most likely explanation however is that the recent fall simply reflects heightened local broker demand for U.S. dollars to purchase U.S. dollar denominated assets, particularly Eurobonds.

I am very confident that with net international reserves in excess of US$2.3 billion the central bank currently has the capacity to defend the Jamaican dollar at this time. However, in my view, the central bank should consider intervening more aggressively to preserve the gains in lower inflation, as with our thin foreign exchange market the perception of a continuously falling exchange rate can force local traders to 'insure' against future foreign exchange losses by pricing their goods at higher rate of exchange, thereby increasing inflation.

At the same conference, Oppenheimer's seasoned international bond trader Gregory Fisher argued with respect to Jamaican Eurobond prices that "When one takes a look at the Jamaican curve, it resembles more that of a 'BB' credit, than one that maintains a single 'B' rating."

From his perspective as a leading trader of Jamaican bonds, Mr. Fisher argued that Jamaica's higher bond prices meant its debt deserved an upgrade, a view supported by our low inflation and the fact that the Bank of Jamaica has lowered rates substantially.

good performance

Surprisingly, the recent good performance is driven by international and not local investors as after "An absence of about six-months, about half of our daily Jaman (Jamaican bond) trading here at Atlanta International/Oppenheimer, is represented by non-Jamaican investors. We have seen huge flows of non-Jamaican liquidity coming back into the Jamaican curve."

My recent conversation with some representatives of the international rating agencies confirmed that, unlike previous meetings, they were not very concerned about Jamaica's current macroeconomic situation. Nevertheless, in my view, long standing concerns about the size of government, Air Jamaica losses, and the ever present risks of higher oil prices and weather on the Jamaican economy make it more likely that a rating upgrade would be one notch to B+ rather than a jump to BB.

lacklustre Performance

As I expected, stock market performance has been lacklustre since the new year, reflecting the shortage of growth stocks and the fact that stocks are no longer cheap. In this context, it is interesting to look at JMMB's top stock picks for 2007.

JMMB identifies Lascelles, Capital and Credit, Trinidad Cement Limited and Jamaica Broilers as growth stocks, whilst its list of income stocks include DB&G, Carreras, BNS, and Desnoes and Geddes, whilst its value picks are Pan Jamaican and Grace Kennedy. Whilst similar to my own picks for 2007, it is worth highlighting where I differ slightly in terms of my characterisation of the companies.

I see Capital and Credit as more of a takeover candidate than a growth stock, whilst I would be more comfortable buying Jamaica Broilers at around $4 due to the dependence of its 'growth' story on its high risk ethanol bet, as well as the potential effect of the rising international price of corn on its bottom line. Overall, my view of the likely performance of the stock market remains 'mildly positive' barring some major shock, or a better than currently expected economic outlook.

Vantage Point

As I expected, stock market performance has been lacklustre since the new year, reflecting the shortage of growth stocks and the fact that stocks are no longer cheap. In this context, it is interesting to look at JMMB's top stock picks for 2007.

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