Barita Insights: Weekly Newsletter July 17, 2020

Analyst Insights

Earnings season is a period when a large number of publicly traded companies releases their quarterly mandatory earnings report. These reports allow investors to assess the companies’ performance over the last three months. During earnings season, some investors are able to profit of short-term gains when the results of companies beat their projections or expectations. We expect the upcoming earning reports to reflect the full impact of the lockdown measures on companies’ business operations, hence, restoring direction to our equity market; as investors will have greater insight about how companies weathered the coronavirus pandemic. Since the work from home orders was lifted on June 1st, 2020, our local market continues to trade side-ways, an indication of a lack of investor confidence. History has shown that the equities market tend to rebound, especially over a long-term horizon, as such it is important to position portfolios in high-quality assets that have strong fundamental value. When looking for money-making opportunities in uncertain times, start small and ensure you are diversified across major asset classes (equities, fixed income, cash and safe haven assets) and major regions/sectors. Investors with a risk profile of ‘moderately aggressive’ to ‘aggressive’ who wish to enter the market, at a minimum, should follow our 3 key suggestions listed below.

  1. Invest for the long-term – investments in the market should be locked away for long-term goals, earning interest on the interest you receive by sticking to a disciplined investing plan.
  2. Contribute gradually – Invest a fixed sum regularly into the same investment products over a long-term period. This allows you to buy more units should prices fall.
  3. Most importantly Diversify – consider low-cost funds which give you exposure to a broad range of stocks while also looking to add different asset classes to your portfolio.

The more conservative investor can benefit from these strategies by investing in a collective investment scheme such as Barita FX Growth Fund and Capital Growth Fund.

What to look for in the equity market?

In general, companies that are best suited to weather this pandemic will have revenue diversification, low leverage (low levels of debt), strong management teams, history of organic revenue and better than expected earnings growth in quarters following the economic lockdown. More Specifically, regarding our Financial companies, investors should be looking at loan loss reserves provisions – have these been increased significantly Q/Q? What are the trends in revenues during the quarter, are fees, trading or interest income the main contributors and is this sustainable going forward? How is the company’s capitalization, does it remain very well capitalized? What about earnings, was the company profitable despite the weak quarter? – on the basis of the answers to these questions, do you think the company performed better than expected and would you expect the performance to only get better going forward?

As for our Manufacturing & Distribution (M&D) companies, investors should be looking at how they are performing in respect of revenues and earnings and what does that say about the economic position of household (consumer spending) and the sectors these companies contribute to (for instance, tourism). Should companies in the M&D sector hold up better than we expect might suggest that an economy recovery could be quicker and anticipated, which would be a tailwind for risky assets. Investors can use this information to get ahead of the crowd and begin positioning themselves in the local equities market.

For alternative industries, investors should be looking at companies that shows resilience in the face of the crisis. For instance, Wigton Windfarm Limited, as the company’s primary options are immune to the impacts of COVID-19 since they operate in the Energy sector. Also we must look to companies that are beneficiaries from the crisis. Given the closure of our borders, consumers would have switched consumer focused towards e-commerce, as such, Mailpac Group Limited is well positioned to capitalize. Finally, investors should be aware of companies that have good rebound potential post crisis. We recommend Wisynco as it has one of the biggest distribution networks, if not the largest, in Jamaica, complemented by a large portfolio of consumer goods. They are also heavy suppliers to the tourism industry which recently reopened. Thus, we expect to see a similar recovery with the company’s earnings.

Investors must also be aware of what guidance the companies’ management team are providing. What is their tone regarding the future: are they negative, optimistic, still unsure? Earning guidance is important because management knows its business better than anyone else and has more information on which to base its expectations on than any number of analyst. In our current economic situation clouded with grave uncertainty, earning guidance because an invaluable tool for investors to use to not only gauge expectations but also to position themselves effectively for the upcoming earning season.

Written by Jonathan Cook, Research Analyst

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Conclusions

The underlying developments in the US...

The underlying developments in the US remain relatively fluid as there remains ongoing debates about reopening’s, the level of the next fiscal stimulus, the level of employment within the economy. What is clear is that the recovery is not as straight forward as many would have expected it to be. As more economic data continues to flow, with recent developments pertaining to a potential vaccine being prepared with positive trial results, uncertainty still remains within the marketplace.

A positive to be taken away from this report...

A positive to be taken away from this report though is that Jamaica’s COVID-19 economic recovery will take time but less than in prior crisis. This is due to the fiscal measures undertaken by Jamaica during the recently concluded IMF program that ended in November 2019. We are much better prepared when compared to previous times and this should resonate confidence into the domestic economy once a collective buy-in from all stakeholders involved in the economy.

Investors with a risk profile of ‘moderately aggressive’...

Investors with a risk profile of ‘moderately aggressive’ to ‘aggressive’ who wish to enter the market, at a minimum, should follow our 3 key suggestions listed below:

1. Invest for the long-term – investments in the market should be locked away for long-term goals, earning interest on the interest you receive by sticking to a disciplined investing plan.

2. Contribute gradually – Invest a fixed sum regularly into the same investment products over a long-term period. This allows you to buy more units should prices fall.

3. Most importantly Diversify- consider low-cost funds which give you exposure to a broad range of stocks while also looking to add different asset classes to your portfolio.

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