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Growth & Jobs | Some challenges ahead, but keep investing, analysts advise

Published:Tuesday | January 31, 2023 | 12:15 AM
Dania Palmer, research manager at JN Fund Managers.
Dania Palmer, research manager at JN Fund Managers.
Dennis Chung
Dennis Chung

Financial analyst Dennis Chung says the stock market remains a boon for persons seeking long-term gains.

“The stock market still has long-term benefits if you want to invest. Obviously, getting a financial adviser to guide you is important,” pointed out Chung, adding that research and monitoring of one’s investments are also necessary.

“The problem is not with the system and the underlying investment, it is the controls around an organisation and around money, and the lack of proper oversight,” he said, pointing to recent adverse events in the financial sector.

Chung underscored that there are many Jamaican companies on the stock market that are currently doing well, and investors should capitalise on their financial growth.

Dania Palmer, research manager at JN Fund Managers, also pointed to positive activities in the stock market, noting that the boost from the widescale reopening of the economy has affected the performance of local companies positively. He pointed out that, similar to last year, their generally improved profit performance may not automatically translate to a boost in the performance of the stock market in 2023.

“Several unforeseen events occurred in 2022, including the war in Ukraine, which sent commodities prices higher and also increased uncertainty in the markets. As a result, inflation, which was already likely to jump due to post-COVID-19 demand, emerged as the main threat to the long-term economic recovery. As a consequence, our central bank, which had started to increase its policy rate towards the end of the third quarter in 2021, increased this rate by an additional 4.50 per cent in 2022. Similar actions were taken in other jurisdictions as well; most notable, the US Federal Reserves raised rates by 50 basis points at its last monetary policy meeting of 2022, after four consecutive 0.75 per cent increases at its meetings before,” he said.

Palmer advised that where investors have the appropriate risk appetite, the equites market remains a good choice for investors, but said careful planning before investing is necessary, amid the various challenges predicted for 2023.

“Generally, investors with a long-term horizon have better chances of doing well when investing in the stock market. But, they must understand that investing in the stock market is a part of holistic financial planning, which includes budgeting, ensuing that (health) insurance and an appropriate safety net (emergency fund) are in place,” he added.

Pointing to forecasts of a possible recession for various countries in 2023, including the US, Palmer pointed out that an emergency fund should be among the priorities for investors in the current climate. The International Monetary Fund has indicated that 2023 will be a “tough year”, with one-third of the world’s economies expected to be in recession.

“The emergency fund is critical, as if it is sufficient, it may prevent an investor from liquidating his/her equities portfolio in a recession, when it could be less than ideal,” he explained.

Palmer noted that since the start of the year there have been signs that inflation could moderate in 2023, a good sign, he said, for companies in general, as it means profit margins could continue to improve this year. But he cautioned that the period of high interest rates is likely to remain for much of 2023, and this, among other things, could be a great impediment to the local equities market’s growth in 2023.

“First, we expect high interest rates to continue to put a lid on equity valuations. Second, with the relatively attractive money market rates now available, it is possible that the outflow of funds from the local stock market will continue this year,” he predicted.

He further added that the activity in the local equities market this year is likely to be negatively affected by the uncertainty arising from the fear of recession, which may force investors to hoard cash as they attempt to stay liquid.

He highlighted, however, that based on current valuations, investors still have a great opportunity to buy several solid, proven blue-chip companies that offer significant value. Stock prices have fallen in some instances to levels not seen in more than five years, even as the operating performance of these companies continue to improve.

“A proven method to invest, which might be most appropriate in this climate, is ‘dollar cost averaging’, which is investing in small, regular, fixed amounts over time to reduce the average cost per share in the portfolio,” Palmer advised.