Many prophecies have failed to come true in recent days, one of which was that the stock market would rally strongly as soon as a new government took charge of national affairs.

Despite some level of optimism toward the change of government; positive earnings from Carreras, FirstCaribbean Jamaica and International, and Jamaica Broilers, and widened institutional appetite for Lascelles, National Commercial Bank, and Scotia Group, the market continues to meander mid-September.

It is early days yet, but just as it appeared that the market was about to change course, confidence is being overshadowed by issues surrounding Jamaica's fiscal situation, devaluation pressures, and volatility in international oil prices.

With the economic impact of Hurricane Dean still being tabulated, institutional investors expressed concerns about the local debt that is apparently nearing J$1 trillion.

In addition, news floated around in the brokerage community that the fiscal deficit is likely to rise sharply as the new government endeavours to fulfil its promises, including free education.

Devaluation pressures also raised its ugly head, triggering frequent bouts of intervention by the central bank.These developments pushed equity investors to the sidelines, and in some cases, into hard currency and fixed-income instruments.

The JSE Index added more than a thousand points last week to close up.

attrition

The Jamaican dollar (JMD) has now crossed the psychological barrier of $70 to US$1.00 depreciating 4.61 per cent year to date, and 1.83 per cent in August alone.

This pace of attrition has forced the Bank of Jamaica to intervene in the market approximately 12 times for the month to bolster supply and calm speculators.

Demand for the greenback has been mainly institutional as brokers bought funds ahead of the last index bond maturity at the end of August. Intervention funds would have satisfied most of the end-user demand, but there are still some short-term concerns regarding the current levels of the net international reserves (NIR) and future supply.

The NIR fell by US$79 million in August to US$2.07 billion.

Continued pressure on the JMD is expected in September as the effects of Hurricane Dean begin to unfold on the deficit (more imports), as well as merchants' seasonal purchases for the Christmas period at this time.

Heading into the winter tourist season, bumper inflows to the system are expected due to the anticipated large-hotel bookings normally seen at this time, which should satisfy demand later in the year.

Barring any exogenous shocks - hurricane, earthquake, etc. - the JMD is unlikely to depreciate at a rapid pace this year.

The dollar is currently trading at J$70.35 to US$1.00.

GoJ eurobonds, commonly referred to as 'global bonds', are some of the most frequently traded fixed-income assets in the Caribbean today, and are ranked by the international rating agencies Moody's and Standard Poor's B1 and B respectively.

currency devaluation

These instruments are denominated in both U.S. currency and euros, which provides the investor with a hedge against local currency devaluation, liquidity and semi-annual (or annual in the case of the euro-denominated bonds) coupon payments.

Tenures on GOJ globals range from 2009 up to 2039 with yield offerings between 4.68 per cent and 8.00 per cent.

While coupon payments (interest) are not taxed at source, investors are still liable for their individual tax returns; however, the GOJ 2011s and 2022s are genuinely tax free. Internationally, these bonds trade by price and are held predominantly by both local and international financial institutions, including U.S. hedge funds.

Considering that the Jamaican constitution prevents the Government from forfeiting payment on the external debt, investors should be less concerned about any possibility of default.

Most clients who opt for yield tend to gravitate toward the longer tenure instruments such as the2036's and 2039's yielding 7.95 per cent to 8.00 per cent, respectively, but experience has shown that the shorter tenured bonds - 2015's (7.65%); 2017's (7.70%) - are they most actively traded in this market.

Compiled by the Dehring, Bunting and Golding team. Email: info@mydbg.com