Stocks can 'turbocharge' development - Former JSE head advises on avoiding debt

Local businesses can cut their debt and grow faster by raising capital through the Jamaica Stock Exchange (JSE), says Allan Lewis, managing director of JN Fund Managers (JNFM).

"Entrepreneurs in the United States of America (USA) and the United Kingdom (UK) normally use their stock markets as a financial tool to grow their businesses," he stated, noting that "in Jamaica, fewer than 100 companies are listed on the main and Junior Stock Exchange (JSE) indices, out of approximately 20,000 businesses registered locally between 2005 and 2015."

He stated that the JSE was incorporated in 1968 to mobilise capital to facilitate the growth and development of companies; and while capital is available, not enough investment opportunities have been presented.

Two stocks were added to the main index in 2015, another was added in 2016, to close the year at 35 stocks, according to data from the Exchange. The JSE introduced the Junior Market in 2009 to provide more flexible listing arrangements for smaller companies, and it has grown to rival the main index in its number of listings in the eight-year period.

"Instead of listing 10 companies to the market in 2017, we should be listing 100," said Lewis, who was chairman of the JSE from 2014 to 2015 and served as a director for several years.

"The JSE was formulated as an alternative to the heavy dependence on bank borrowing by local businesses," he pointed out, "as one of the challenges to corporate growth for many is the lack of capital and their high level of indebtedness."

OVERCOMING DEBT TRAP

Donald J. Harris, a Stanford University economist, in his 2010 paper on "Jamaica's Debt-Propelled Economy", reported that the country had the alternative of maintaining its failed strategy of depending on debt or switching to an export-led growth strategy, successfully used by countries such as South Korea.

"To overcome their debt trap, entrepreneurs should aim to build businesses to transcend financing challenges," Lewis said. "We need to take on the examples of successful local and international businesses, which diluted the ownership by their founders in order to raise the capital to go global."

He added that in countries such as the US and the UK, their stock exchanges include companies that are broadly representative of their economies.

"In Jamaica, the Exchange is weighted towards the financial sector and underweight in other sectors such as the dynamic tourism sector," he said. "We need foreign exchange to power our development, therefore, it would be strategically significant if this vital sector could start to harness the capital available through the Jamaica Stock Exchange."

... STOCK MARKET A SOLID INVESTMENT

Another challenge is the need for improvement in the rules on disclosure and transparency, he said. "Our laws need to be brought up to international standards to ensure better protection of shareholder interests."
Despite this, the overall operations of the JSE have improved substantially over the last decade, with innovations such as the introduction of the Junior Exchange, piloted by Marlene Street Forrest, general manager.
Lewis noted, "She has keenly promoted the exchange, and has worked assiduously to improve its operations." 

And critically, he pointed out, the stock market is a solid investment.

The JN Fund Managers MD noted that, "at JNFM, we have been articulating the value of the stock market to encourage more of our clients to appreciate the benefits, conscious of their 'risk tolerance'."

"For those who are seeking a longer time frame of five years and beyond, investing in stocks has provided the best risk-adjusted return," he said. "You have to be patient, and have the fortitude to understand that when the market is not doing well, you buy, rather than sell. And, recognise that the stock market benefits investors, listed companies and the wider economy, alike.