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Analysts bullish on investment prospects despite market turmoil

Published:Wednesday | January 18, 2012 | 12:00 AM

Marcella Scarlett, Business Reporter

Even in the midst of reduced confidence in the local economy and Government of Jamaica debt, a eurozone on the brink of recession, and a cooling off of emerging markets, analysts are still optimistic about investment opportunities in areas such as real estate and commodities in the year ahead.

Adrian Stokes, vice president in charge of strategies, planning, projects and product development at Scotia Investments Jamaica Limited, expects growth in emerging markets will remain positive, even though it has slowed, and that these countries' debt still remain viable investment options for investors.

"In fact, we expect a positive growth differential when emerging-market economies are compared to their developed-market counterparts," said Stokes.

Additionally, Stokes believes US interest rates should stay "anchored" as the United States central bank, the Federal Reserve, is not expected to raise interest rates anytime soon.

Still, market analysts expect the early months of 2012 to be impacted by events in Europe.

"The global environment is expected to be challenged by issues related to the European debt crisis in 2012," said Roy Reid, portfolio and investment strategies manager at Jamaica Money Market Brokers.

Unending crisis

The eurozone has been plagued with a series of unending crisis that has seen governments struggling to convince financial markets that they will not default, and that banks exposed to sovereign debt would not be allowed to falter.

The lack of confidence was cemented by the bailouts of Greece and Portugal last year and Italy and Spain having to borrow at higher cost.

Reid's comment came ahead of Friday's downgrade of nine eurozone countries by Standard & Poor's, among them top-notch France and Austria, as plans to get a bailout fund up and running continue to face delays. The others were Italy, Spain, Portugal, Cyprus, Malta, Slovakia and Slovenia.

On Monday, S&P also downgraded the European bailout fund, the EFSF. Having cut the triple-A rating of two eurozone countries, the fund was left without the required Triple-A backers to maintain its own Tripe-A standing.

Stokes advised that investors, "if they are looking for capital preservation", should look to invest in countries such as Canada - the home market of Scotia's parent company - which, he said, has "good debt dynamics".

Reid pointed to the US commercial real estate market through vehicles such as the IWC Opportunity Fund 1. He said prices are still pretty low in the real estate market following the 2008 global financial crisis, and capital gains can be achieved where real estate is acquired at current prices.

Additionally, "investors would benefit from cash-on-cash returns from cash flows received from rental income," he said.

Reid also sees investment in commodity as a viable opportunity for investors in 2012.

"This year may be another big year for commodities such as gold and silver as investors seek to use them as stores of value and hedge against currency fluctuations and other perceived risks."

Gold prices last year shot up to US$1,900 per ounce in a flight to safety by investors, as Europe worked through its crisis and in the wake of the US' flirtation with default last July, and are now performing at around US$1,640. Silver traded at an historic high of US$48.70 per ounce last year but has since dropped back to US$30.

Locally, investment houses can facilitate investment in gold-backed securities, but Reid admitted demand is not very high.

Internally, analysts say performance of the local fixed income market and the GOJ global bond market are heavily dependent on the actions of the new government.

One global institution, UBS, has already advised its clients to stay away from Jamaican debt, at least until there is a clear understanding of IMF "flexibility" regarding the stalled bailout programme, which Jamaica wants to renegotiate.

Actions by rating agencies may also have a significant impact on how investors perceive local assets and, therefore, impact how they will perform.

Room to manoeuvre

But whether domestic yields rise or fall, local life insurance companies, which manage both policyholder and pension funds, will have little room to manoeuvre.

"We really don't have much option," said Michael Parker, vice president at Guardian Life Limited.

He explained that insurance companies are required to hold the majority of their overall investment portfolio in Government of Jamaica and local assets. The portion of the portfolio in foreign investment is subject to risk weighting and capital charges.

The Bank of Jamaica requires that insurance companies allow themselves only five per cent exposure to foreign investment, even though the Financial Services Commission had provided that they may have up to 20 per cent.

As regulator of the foreign exchange market, the BOJ's stipulation would trump that of the FSC.

Parker said Guardian would continue to look in the direction of equities, a market segment in which insurance companies are among the largest investors, as well as short-to-intermediate term GOJ bonds.

The Jamaica Stock Exchange (JSE) performed well in 2011, ending the year as the sixth best performing stock exchange globally. The local JSE Junior Exchange also outperformed other indices, offering the highest index gain in the world.

At least three companies are expected to launch junior-market IPOs shortly.