Keith Collister, Contributor
( L - R ) PATRICK CROWL and VERNON JAMES
JAMAICA'S stock market was overvalued in 2004 and prices have come down substantially since then, but is it a good time to invest now?
The Financial Gleaner invited some of Jamaica's leading stock market experts representing the majority of Jamaica's stockbrokers to a forum last Friday to discuss the state of the Jamaican stock market. The experts were asked why there had been a bear market, and whether the bear market had ended making it the right time to buy stocks.
Barita's Patrick Crowl argued that looking back at 2004, the market was "really crazy and there was no justification for a lot of the prices.., I looked at the numbers and [only]a few of them deserved to be where they were." He added that people expected the bull run to continue into 2005, and after it didn't, they started to look more closely at the numbers.
First Global's Nielson Rose agreed that a lot of stocks were overpriced in 2005 in terms of their price to earnings ratios with the result that, "The companies were going to have to generate enough profits to justify those ratios or the stock prices were going to fall back to levels where they trade comfortably."
Mayberry's Wade Mars argued, "There were a lot of new entrants in the market, round about the time when it was running towards its peak and these new people were actually the ones who were buying most aggressively."
EXTRAORDINARY ITEMS
He added these new entrants were "Purchasing based on the price movement they had seen in the last year... In a lot of cases, the stock prices were being influenced by what you call extraordinary items that were not sustainable in terms of the company's core earnings, so you would have a company selling a piece of property and that would influence the stock price".
Vernon James of Dehring Bunting and Golding agrees the market went too high in 2004 - "valuations were just stratospheric" He argued the initial stages of the bear market really started with Dyoll, which as another failed company, started to chip away at investor confidence. This was followed by the Mayberry IPO, which while "very very successful" its subsequent fall "really had an impact on the confidence level in the market. " Before Mayberry "the perception was that an IPO couldn't fail, you could close your eyes and buy an IPO after the recent history of IPOs," Supreme Ventures followed after Mayberry, and, according to James "The private placement was spectacular [but] then you had the IPO which pretty much failed."
Veteran financial analyst John Jackson disagreed. "The IPOs and Dyoll are non issues; they are non issues because those things affect retail investors; retail investors don't drive the market. The institutional investors are knowledgeable - to a great extent as to where they put their money. You don't have a wide across the board holding of Dyoll shares in any significant amount by institutional investors. The same thing applies to Mayberry [and] Supreme Ventures." In his view, the institutional investors pulled back last year because they did not agree with the level of the P/E ratios.
He adds "Some of the companies could not deliver or could not maintain the [earnings] momentum that existed before and were likely to have flat earnings as BNS ultimately did." Moreover, the earlier hurricanes created havoc as they drove up oil prices, forcing the Bank of Jamaica to slam its foot on the brakes with respect to money supply " That is what has kept the market [down]. The market cannot perform well if money supply is tightened; "if there is no liquidity, the market won't be driven."
In Mr. Jackson's view, an additional reason for the stock market decline is that business people know business is bad. They won't buy stocks because they know the fact that their sales are poor is an indication of what is taking place in the wider economy. The poor business climate showed up in poor company performance in the second half of last year. "In that type of scenario you don't go out and invest your money unless you see an appealing offer that you can't resist."
See the second part of this series on the stock market in Sunday Business.
