Two more dry years projected for stocks

The combined indices of the Jamaica Stock Exchange, JSE, will likely struggle for two more years to 2025, which is the expected timeline for a smooth landing from the reduction in interest rates seen as the bane of the stock market’s performance.

JSE Group Managing Director Marlene Street Forrest was downbeat about interest rates while updating the Financial Gleaner on the JSE’s achievement of adding Canadian trading, its technical challenges related to implementing short-selling, and its two-year outlook, in a year-end interview.

“The JSE expects that should the interest rates be lowered, there will be signs of market improvement,” said Street Forrest, while noting that inverse relationship between stock market performance and interest rates.

“Naturally, we are anticipating that this will occur and that full market recovery would be evident in 2025 because any change would still have a timing lag,” she said.

The market enters 2024 with four straight years of decline, which started with the onset of the pandemic in 2020.

Stocks are still feeling the effects of wider economic realities but opportunities still abound in the $2-trillion market. Ciboney, which was taken over as a shell company by new investors, closed up 180 per cent, microlender ISP Finance rose 100 per cent, and toll road operator TransJamaican Highway, gained 90 per cent

Those gains were outliers. The performance of the overall market is what will set the baseline for growth for portfolio investors. And at year end the market was down eight per cent.

On the final day of trading for 2023, the market rallied to give the JSE Combined Index, which includes the JSE Main Market, JSE Junior Market and the JSE US Denominated Index, a more than one-point boost. However, the overall market still ended eight per cent lower than its starting point in 2023, reflecting a more than 29,4000-point decline from 368,592 to 339,158 points.

The main market, which features the most heavily capitalised stocks, performed at its third-worst in a decade, having fallen by 8.48 per cent. Its worst decline was in 2020 when it shed 22.4 per cent after falling victim to the pandemic.

The junior market, which features small and medium-sized companies, dipped 3.46 per cent in the year, which broke two years of gains. In the pandemic year, the junior market fell 21 per cent.

Also, the USD market dipped 1.25 per cent while breaking two years of gains. It also fell in 2020.

The market’s misfortunes coincide with investors exiting stocks to pour funds into real estate, as well as other capital market investments to take advantage of fixed returns, which rose in the wake of the central bank’s policy of hiking interest rates to cool down inflation.

Bank of Jamaica, BOJ, held the policy rate steady throughout 2023, but that’s after an aggressive period of adjustments that vaulted the policy rate from 0.5 per cent to 7.0 per cent, to curb inflation which peaked at 11.8 per cent in April 2022.

In 2018, when the BOJ policy rate was at 2.0 per cent region, the JSE topped the world as the best-performing stock market. Also, in 2015, when the JSE first topped the world, the BOJ benchmark rate stood at 5.0 per cent. During both periods, investors needed riskier instruments to beat inflation.

The pandemic, while a health crisis, also spawned an economic and logistics crisis. To stem the spread of the virus, entire cities were locked down, which in turn led to bottlenecks in the movement of goods.

The logistical nightmare that evolved resulted in a spiked shipping costs between five to times normal costs. And commodities became more expensive. And travel on which economies like Jamaica were dependent for tourist visits to feed their economies also fell into the doldrums.

Concurrently, governments, offered their citizens cash to stimulate their economies.

And the conflagration of events, later exacerbated by war in Europe, all resulted in global inflation.

But now prices around the world have started to cool down.

In Jamaica, the 12-month inflation rate stood at 6.3 per cent in November, nearly in line with the top-end end of the BOJ’s target range. Within the current environment, large investors still view fixed-income securities and real estate as offering yields above inflation, while protecting their principal investments.

The market decline in 2023 has brought renewed calls for the JSE to proceed with the implementation of short-selling, a plan that has been in the works for several years. Investors in larger economies can short the entire market as a hedge against volatility.

“The JSE is in the process of implementing short-selling as a feature on the trading platform and establishing a lending and borrowing system to manage the securities that will be lent and borrowed as a part of the short-selling process. This is a comprehensive process and includes various stakeholders and market participants,” Street Forrest said.

Short-selling allows investors to profit from falling stock prices under what is generally referred to as SLBM or securities lending and borrowing mechanism. To do this, investors digitally borrow shares from their broker at a set price and fee. On the back end, it requires the investor to open a margin or lending account with the broker, since they are borrowing the shares. And locally, that’s part of the issue.

“During testing, issues were observed that required resolution from the vendors. Challenges were also experienced during the implementation process. The issues have since been resolved,” Street Forrest said.

Additionally, the testing time was extended to allow for a thorough understanding of the SLB system by all users and to develop the necessary rules and procedures. She added that the drafting of the rules also took longer than initially scheduled due to the internal and external review process.

“We anticipate that the draft rules will be submitted to the Financial Services Commission for approval shortly,” she said. “Due to the complexity and relative newness of the product, the additional time taken to understand and test the system will facilitate a smooth rollout.”

In July 2023, the JSE launched its Direct Market Access platform giving local investors access to the Canadian Stock Exchanges through their local broker. Currently, the JSE has two DMA participating local brokers, CUMAX Wealth Management Limited and Barita Investments Limited.

“Since the launch of the DMA platform 154 JCSD DMA accounts have been opened and they have traded in 68 securities. Volume traded to date is 40,067 and we expect that there will be an uptick in 2024,” Street Forrest said.

In 2024 the focus for the JSE will be on adding other brokers to the platform, increasing the number of local investors and opening access to other foreign markets.

steven.jackson@gleanerjm.com

JSE Main Market performance over a decade:

2023 down 8.5%

2022 down 10%

2021 up 0.1%

2020 down 22.4%

2019 up 34%

2018 up 31.7%

2017 up 49.9%

2016 up 27.6%

2015 up 97.4%

2014 down 5.3%

JSE Junior Market performance over a decade:

2023 down 3.5%

2022 up 16%

2021 up 29.7%

2020 down 21.1%

2019 up 3.1%

2018 up 18.8%

2017 up 5.34%

2016 up 44.8%

2015 up 160.3%

2014 down 9.2%

JSE USD Market performance over a decade:

2023 down 1.25%

2022 up 19.6%

2021 up 4.9%

2020 down 16.7%

2019 up 41.74%

2018 down 3.95%

2017 up 1.02%

2016 up 2.1%

2015 up 18.9%

2014 up 4.8%