Bank of Jamaica
Hopeton Morrison, Contributor
THE YEAR 2004 closed on a clear signal from the central bank as to where its policies will be heading in 2005. With the latest of several rate cuts taking place on December 29, the indication is that fixed income securities already rendered unattractive by some 10 previous reduction in rates by the Bank of Jamaica (BoJ) over the course of last year, will almost certainly become a negative earner this year. This forecast is supported by the following indicators.
MEAGRE RETURNS
With inflation coming out at 13.1 per cent for 2004 and benchmark rates on 30-day BoJ open market instruments lowered to 14 per cent investors are looking at meagre returns when withholding taxes are factored in. That is, your 14 per cent interest less 25 per cent of which is taken as withholding taxes leaves a net interest of 10.5 per cent. Even factoring inflation it is likely that negative real returns will be realised at around -2.45 per cent.
Local fixed income is definitely not 'in' for 2005. On the other hand, this year seems set to be another excellent one for investment in local equities. Please refer to the table showing the 10-year trend in our local equities market.
The trends of the previous 10 years, but even more specifically of the last five, show a negative change in the main Jamaica Stock Exchange index only once in that period. A more important indicator however is the movement of the index relative to the inflation figure.
The index has performed impressively measured against inflation in the five-year period beginning in 2000, and even more impressively over the last three. In the two years that inflation entered double digits (2002 and 2004) the index generated significant real returns bettered only five times before over the 34-year history of the index since 1970.
The JSE performed better in 1981 when it gained 118 per cent on the back of inflation of 4.6 per cent. In 1984 when a growth of 92 per cent was matched by 31.2 per cent inflation, in 1985 when a 104 percentage growth was matched by inflation of 23 per cent, in 1991 when the index grew by a phenomenal 202.52 per cent against inflation of an equally breathtaking 80.2 per cent and finally in 1992 when the index climbed an astounding 235 per cent against inflation of 40.2 per cent.
In matching the year to date performance of the main JSE index, the unit trust funds have more or less mirrored the difference in how equities have fared against fixed income funds. The 12-month (2004) growth rate of local equity funds has significantly outperformed fixed income funds. Most of the funds had a year to date (YTD) growth of over 90 per cent compared to fixed income securities which had a YTD growth in the 17-18 per cent region.
ENOUGH HARD
CURRENCY AVAILABLE
Hard currency investments will hardly be anymore attractive in 2005 as a hedge against inflation than they were in 2004. With the Bank of Jamaica now carrying Net International Reserves in excess of US$1.8 billion and another US$1.8 billion in 'A' and 'B' accounts in commercial banks, building societies and merchants banks at September 2004, there is enough hard currency available to the BoJ to defend the local dollar barring all reasonable acts of God or man except perhaps a tsunami of the catastrophic magnitude that rocked Asia last week.
The Jamaican dollar vis-a-vis the greenback held very steady last year slipping from $60.5: US$1 on January 2 to $ 61.88: US$1 a loss of $1.31. or less than two per cent at December 29. This is an exceptional performance considering that all of this occurred in a year when the central bank cut benchmark rates relentlessly almost on a monthly basis. With the levels of NIR available matched by an equal amount of hard currency funds in local A and B accounts investments in hard currency accounts will be appropriate to provide a prudent mix for diversification only. It cannot be expected that these will be able to match the returns available in local equities based not only on the factors above but additionally on some new developments that are on the horizon.
At least three new companies are getting set to list on the local exchange this year. This is very good for any market as it signifies a broadening and deepening of the market itself offering greater opportunities for investors to benefit from a bigger pool of funds, profits and all of the other factors that create dynamism in a market. At least one locally listed stock is also slated to be cross-listed regionally later this year.
Other developments considered to be of significant importance are the new investments driving the economy. One can be bullish on the potential of the Jamaican economy and it is great to see now that this potential is approaching realisation. Highway 2000, tourism, information technology and bauxite are projected to drive growth in the Jamaican economy toward levels that we have not seen since the 1960s. There are glimpses of what might have been in the first half of calendar 2004 but Hurricane Ivan derailed much of this in the second half. It is hardly likely that the country will encounter another hurricane of the magnitude of Ivan over the next 12 months. I remain guided by the broader trend and look forward to a medium term of moderate to strong economic growth in 2005 and beyond.
Finally, a word on real estate. Unfortunately, it seems that the real estate market outside of the lower income houses in St. Catherine is driven by those who have unlimited cash resources. It is the dream of many professionals to own a new home in the Kingston Metropolitan Region but the cost of town homes and what used to be middle income homes in these locations have gone out of the reach of many, if not most, professionals. There was a time also when real estate was also a most effective investment vehicle but oppressive transfer taxes, stamp duties, GCT and a host of other charges have made this a challenging route to take towards financial independence.
CRIME FIGHTING
It is hard to see how middle to upper income level homes will become any cheaper in the short term, specifically in 2005, unless our crime fighting and justice systems can flush out some of those who continue to use their ill-got gains to distort the market.
In conclusion then, 2005 will be a year where local and regional equities will be the main game in town.
Hopeton Morrison is
general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments
and questions to: hmorrison@stccu.com
