Keith Collister, Contributor

The ordinary investor could be forgiven for feeling overwhelmed by the quantity of information released on the state of the economy released over the past month, beginning with the Budget Debate and ending with the IMF annual article four presentation.

United States investment bank Bear Stearns downgraded our debt to 'underperform' at the beginning of last month due to our much higher-than-expected fiscal deficit.

Contrary to the views of many analysts however, Jamaica'spoor fiscal performance has so far had very little impact on our international bond prices trading in these instruments appears to have slowed over the period.

One reason is that since the China-driven stock market sell-off at the end of February, international financial markets have been extremely buoyant on the back of very strong international liquidity, with no sign yet of a diminished appetite for risk outside of the U.S. housing sector, a critical factor for a country with our low credit rating.

With the exception of Grenada and Belize, which are recovering from debt defaults, Jamaica's eurobonds are the highest yielding in the Caribbean and Central American region, and therefore, attractive to inter-national investors pursuing yield, who undoubtedly believe that in the current low-interest rate world they are more than compensated for Jamaica's current very low risk of default.

S&P REAFFIRMS 'B' RATING

Rating agency Standard and Poors appears to share this view of our default risk, reaffirming our 'B' rating this week, despite what they describe as our "weaknesses" including the difficulty in reducing our debt burden due to a "worse-than-projected fiscal performance", our "limited fiscal flexibility" and our "vulnerability stemming from the island's geographical location size and openness."

While we have not been punished by the international markets for missing our fiscal target, our relative lack of economic progress, particularly in the area of budget deficits and debt reduction, has meant that a number of what were comparably rated countries (Dominican Republic, Uruguay and even Argentina) now have a higher rating than Jamaica.

Moreover, as stated by S&P, we are unlikely to see a rating upgrade any time soon so that our external interest rates are unlikely to fall and may even rise if markets become more risk averse.

Perhaps more importantly, it is likely to become increasingly difficult to further reduce domestic interest rates as a result of our large budget deficit. In the run-up to the Budget Debate, the domestic market apparently expected a cut in domestic interest rates, which it didn't get. In Wednesday's press briefing, the Central Bank governor made reference to "the recent bout of instability" in the currency, which apparently was not related to fundamental demand, but may have been related to position taking in foreign exchange.

After a sharp recovery in the latter half of 2006, the grinding bear market has continued with market indexes down between 10 per cent and 15 per cent depending on what index you use.

At the beginning of the year, I expected the market to be up by the end of the year, but advised that at the then average price earning ratio of 12 it was not cheap, particularly considering the poor earnings performance of most stocks.

The market is now much cheaper, and some of the companies I have argued would turn around - such as GraceKennedy - are now starting to produce very creditable results. However, we are now entering the traditional slow stock market period — "sell in May and go away" is an axiom that is accentuated by the hurricane season, which starts June 1.

Our higher-than-expected deficit is also likely to impact the market, as it will have delayed any significant cut in domestic interest rates. My current view is the market will probably drift sideways for the next few months, as it awaits the catalyst of either lower interest rates or the end of uncertainty as to who will be in charge of the country for the next five years.

However, a three to six-month wait is not a very long time for serious investors, who should be setting price targets to pick up shares over the period.

This week, some of the stocks previously recommended as buys in this column, reported earnings, namely Lascelles, Pan Caribbean, Life of Jamaica and Grace. The first two companies were also recommended as buys at JMMB's Smart Money investor briefing on Thursday evening by their veteran equity analyst Keisa Ansine.

She recommended both Lascelles and Pan Caribbean at theirthen current prices of $240 and just over $18 respectively. Both stocks have a PE below 10 and are trading only marginally above book value.

At first glance, Lascelles quarterly results look slightly disappointing, but, according to Stocks and Securities Mark Croskery, "Backing out the extraordinary dividend from Carreras, Lascelles results would be up 22 per cent year over year, very good." And, despite Pan Caribbean's flat results he also agreed it was a good medium-term buy.

In his presentation at JMMB, CEO Richard Byles told investors at JMMB that there should be no more earnings dilution from the issuance of new equity, which has been one of the factors holding back Life of Jamaica's stock.

It was on this basis that we had recommended that investors buy LOJ at $7 or below over a month ago. Its more than 15 per cent growth in first-quarter earnings per share provides strong support for this view.

Finally, our projection of GraceKennedy as a "turnaround" stock this year seems to be on the money, with an approximate 25 per cent increase in first-quarter profits over the comparable quarter last year.

keithcollister@cwjamaica.com