Sat | Dec 10, 2016

The Jamaican stock market's bearish trilogy

Published:Friday | January 16, 2015 | 12:00 AM

Aubyn Hill, Financial Gleaner COLUMNIST

In investing terminology, when a stock market is said to be bullish, it represents a market of growing stock prices and generally positive returns to investors in such a market.

When the term bearish is employed as the description of a stock market, it suggests that investors have negative expectations and are selling stocks to get out the way of bad news and negative returns.

The very famous Bulls and Bear bar at the landmark Waldorf Astoria hotel in midtown Manhattan, New York City, was named to capture the rival dual sentiments of Wall Street.

Our local stock market, the Jamaica Stock Exchange (JSE), ended 2014 on a bearish note. The main index traded five per cent lower than where it started on the first trading day in 2014. That was on top of 12 per cent drop in trading activity in 2013 over 2012 and the trilogy of loss-making years started in 2012 when the index fell by three per cent, compared to the results of 2011.

In 2011, the last year before the Government changed, was the last time in the past four that the JSE main index recorded an increase over the previous year. Against the losses of subsequent years, that year-on-year profit of 12 per cent stands out.

One theory which seeks to explain stock market behaviour contends that current prices are a reflection of future direction of the sentiment of the market. In other words, decreasing prices suggests that market players expect securities to have a negative posture in the near future, while the opposite is true when current prices are in bullish territory.

According to the theory, an efficient and well-populated stock market discounts future values to current prices.

Many will agree that our JSE is small but well regulated. Alas, it needs many more companies to list in order to expand the population of traded securities on the exchange.

The 12 per cent increase in the market's activities in 2011 followed by three years of continuing losses make a clear statement that investors do not expect stock prices to increase anytime soon. Also, investor confidence in the managers of our economy is very low.

PLAYTHING OF CAPITALISTS

Government should facilitate the growth of the stock market as an intrinsic good.

A vibrant and successful stock market provides a meeting place where those who are in need of cash to grow their businesses can meet those investors with cash who want investment destinations which offer transparency and liquidity when they need to sell their shares.

To some onlookers, the Government treats the stock market as something to be ignored, or worse, a capitalist plaything to be punished.

Legislation was passed to reduce the tenure of incentives to investors on the junior market from 10 to five years. This single move threw a considerable dose of cold water on fledgling investor enthusiasm.

The government policymakers and their advisers seem to have little or no care for this investor attraction known as the stock market, and especially the junior part of the institution, which encourages entrepreneurs who own small, new and established businesses from which they want to exit a place to sell and cash out.

Others use the stock market to buy into new and existing companies.

The new law to limit the incentives to those companies which wanted to list on the Junior Stock came into being in 2013. The effect was dramatic. In 2013, five companies were listed on the junior market; four each in 2012 and 2011, and seven new companies were listed in 2010. By contrast, only one new company was listed on the Jamaican Junior Stock Exchange near the end of 2014 - the year after the benefits were slashed by the Government. If the Government wanted to custom-make a real disincentive it could not find a better one.

BUYING OPPORTUNITIES?

Although sentiments may be negative towards the economy overall, and to the stock market in particular, three years of running in reverse means that there are attractive stock trades to be made.

The brave, intrepid and calculated risk takers with cash can find real opportunities in shares on the JSE. Well-capitalised companies with long years of profitability under their operating belts are trading substantially below their book values.

Some companies on the exchange pay quite good dividends and so provide a good and reliable source of income.

Some investors will find these regular dividend payments to be just the kind of financial flow and security which they are looking for. Capital gains - the increase in the price of the shares after they were purchased - will be harder to come by given the negative economic conditions.

Still, what makes a market is the fact that persons with opposing views are willing to buy and sell stocks at any time.

Some may feel that after three years of negative finishes by the JSE and the resulting fall in stock prices, and the fact that the Government has passed seven IMF-inspired fiscal tests, the time may be right to go into the market and buy stocks.

The beauty about a stock market is that when these intrepid early-moving buyers surface, there will be sellers to meet them.

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the opposition leader's Economic Advisory Council.Email: writerhill@gmail.comTwitter: @hillaubynFacebook: facebook.com/corporate.strategies