Bearish Jamaican stock market tracks faltering economy
The Jamaica Stock Exchange’s Main Index, when mapped on a chart, shows the formation of the largest bearish pattern in 25 years.
The formation, which takes the classic head-and-shoulder shape of a market in transition, shows Jamaican stocks rocketing to highs, then just as dramatically falling towards new lows, the most recent of which tracked with the emergence of the coronavirus.
The JSE main market made the first shoulder formation in September 2018, hovering at just under 350,000 points, then broke out to form the head, which peaked on August 8, 2019, at 532,325 points.
The next fall-off in the index began to manifest in January of this year, starting slowly then gaining momentum in its southward drift in March to hit a low of 337,000 points. The market later stabilised, with a slight recovery towards the current 370,000 range to form the second shoulder.
Year to date, the Main Index is still depressed by more than 27 per cent, partly weighed down by sentiment around the economy, which first began showing softness in the fourth quarter of 2019 when GDP shrank by a near-negligible 0.04 per cent, but got exponentially worse under the pandemic, including an unprecedented 18 per cent contraction estimated in the June quarter. The economy is now forecast to contract by around 10 per cent overall this fiscal year.
Still, a large share offer by Barita that received subscriptions of $20 billion in recent weeks, well above the $14 billion on offer, is a likely sign that investors are beginning to shrug off some of their negative outlook when it comes to stock holdings. A small $345-million junior market IPO by Tropical Battery also received immediate take-up this week.
The performance of the JSE index in 2019 and into 2020, when plotted graphically, shows one of the most prominent head-and-shoulder technical indicators in 25 years. Such a formation tends to signal the exit of a bull run and the move towards a bear run.
Additionally, the rise in the market, when mapped against economic growth, shows a near-perfect match in the formation. The mapping shows that when the economy hit 2.0 per cent growth in the December 2018 quarter, the market started jumping towards its peak; and that when the economy started to wane, reflected by lower GDP growth, it was matched by a decline in the JSE index.
Looking back since 1995, which was the earliest data available on the JSE website, the three largest drops in the index occurred during the local financial crisis of 1995, the United States-led financial crisis in 2008, and the ongoing pandemic of 2020.
Two of the top 10 worst trading days in 25 years occurred in March of this year. The market lost 4.8 per cent of its value on March 16 and a further 4.7 per cent on March 21.
The worst trading day in 25 years occurred on February 7, 1995, when the market index lost 44 per cent of its value, but then regained all the lost ground the following day, according to JSE data. Its second-worst historic showing was on June 16, 2008, when the market shed 16 per cent of its value.
The previous head-and-shoulder formations resulted in the market taking three years to recover in the case of 1995, when the market dipped from roughly 24,000 points to a low of roughly 12,000 points. It recovered in 1998, when the market peaked at 25,000 points.
Then, in mid-2005 the market entered into another head-and-shoulder formation, peaking at 120,000 points before dipping to 80,000 points in July 2006. It would not recover fully until a decade later, in October 2015.
In that year, the Jamaican stock market started to reprice stocks from below seven times earnings to twice that, at 14 times earnings.
It followed from improved macroeconomic indicators and better economic growth. It was also the year the Jamaica Stock Exchange outperformed the world in terms of index growth. The index then moved from 75,000 points to 150,000 points.
A bearish market does not preclude gains. For instance, in August of this year, even with the overall market consistently in the red, seven stocks made double-digit gains in the month, ranging between 14 per cent and 68 per cent.
The top performers were Eppley, Kingston Properties and QWI Investments on the main index; and Caribbean Flavours, CAC 2000, iCreate and Derrimon Trading, which trade on the junior market index, gained 68 per cent, 32 per cent, 16 per cent and 14 per cent, respectively.
Despite those and other gains, the combined market shed $5.3 billion in August, and the index declined in the process to $1.5 trillion in valuation.
Those declines have been consistent since the spread of the coronavirus, disrupted only in May when the market gained $84 billion to close at $1.65 trillion.
Most of the stocks that advanced in value released earnings or made announcements of stock splits or share buy-backs that catalysed the stock prices higher.
Historically, it wasn’t immediately clear which stocks or sectors fared better during market crashes, but since March investors have been gravitating towards stocks that generate cash – especially those that issue strong dividends, such as Carreras and Scotia Group Jamaica.
The JSE Group in its latest quarterly results said it expects the pandemic to continue impacting the market for the rest of this year.