Hopeton Morrison, Contributor
Access to and use of accurate information is the foundation to all good investment decisions.
IT IS always a good idea to diversify one's investment portfolio. And diversification can mean either investing across asset classes such as stocks, bonds, and real estate or investing in more than one geographical location. With a number of local stocks cross-listed on the regional markets in Trinidad and Tobago and Barbados this offers an excellent opportunity for geographical diversification.
But there are more than a few Jamaican investors who have accounts in the North American and European markets for a combination of reasons. Some are returning residents, some live between Jamaica and their adopted country while others have just evolved into global investors. Whatever the reasons there are many good reasons, to engage in geographical diversification.
STOCK MARKET BULLISH
The Jamaican economy has remained flat for much of the last decade and as much as the local Jamaican stock market has been very bullish for six of those years, it seems we are at that point at which the market has approached some degree of equilibrium with the economy in which it is functioning. This has resulted in the 11-month bear market which we are experiencing.
It is certainly an appropriate time to engage in geographical diversification. The really good thing about this however is that you the investor need not engage in any unnecessary hassle unless you are so inclined.
HARD CURRENCY FUNDS
There are increasing numbers of hard currency mutual fund products now being offered by brokers and investment houses such as Scotia Jamaica Investments, NCB Capital Markets, First Global Securities and, in the news last week, Mayberry which is to start marketing Raymond Chang's CI Funds.
Geographical diversification is by no means a phenomenon that is unique to Jamaica as even in the big markets of North America, Europe and Asia, investors are constantly advised to engage in this type of cross border investment.
Spreading your risk across markets that rise and fall at different times not only reduces your risk but increases your overall returns. Add a multiplier to this risk here in Jamaica where we are prone to double digit inflation to which we fell victim in the last two calendar years, as well as depreciation in our currency against the greenback.
Financial theory holds that almost 50 per cent of the risking inherent in any individual stock can be eliminated if that stock is held in a reasonably well diversified portfolio. That part of any stock's risk that can be eliminated is termed diversifiable risk. Contrast that now with that part of a stock's risk that cannot be eliminated, called market risk. Businesses everywhere are prone to the effects of such occurrences as strikes, lawsuits, failed marketing attempts, and other events specific to a particular corporation.
These are the events that diversification attempt to eliminate. On the other hand market risk is caused by events such as inflation, recession and high interest rates, and these events affect most stocks. That type of risk cannot be eliminated by asset class diversification. Hence the wisdom of investing in markets outside of yours.
And even here there are no guarantees so it is important that an investor chooses the right market and the right investment in that market . Which brings us to the second important reason for investing overseas, that of opportunity.
Experienced investors seek out well managed companies that are in high growth industries. As an investor you also want to find these companies in a market that is strong and liquid (that is where your stocks are very marketable and can be disposed of quite
easily). There are some high growth industry sectors that are not even available on the local market, notably technology and energy stocks.
The hospitality industry is one of the fastest growing in the world, but outside of our local Pegasus stock there is no other opportunity to share in that boom. To get a share of these stocks in some world class companies then you will have no option but to look overseas either directly or via a mutual fund.
Bear in mind that access to and use of accurate information is the foundation to all good investment decisions. As an investor fundamental and technical information is available in the financial press, on company websites and from sundry government sources.
* 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
