COVID-19 Check: ‘Every Little Thing Is Gonna Be Alright’
Haughton Richards, Senior Research Analyst
Three months since the outbreak of COVID-19 in Jamaica, we have observed a material change both at the microeconomic level and at the macroeconomic level. Shifts observed include incorporation of technology in our daily operations, showcased in the work-from-home style adapted by businesses, a fully cash-less farmers market and the ongoing contemplation of making some typical government applications that can only be done at tax offices, an online process (this warrants a hooray!). But in between where we are today and where we were, a lot of structural shifts within our economy has changed, and we seek to examine that today while looking into our “Money IQ” crystal ball to assess what our future holds.
Firstly, we must acknowledge that Jamaica is a small open economy in the global marketplace. By this very definition, Jamaica’s economic performance is significantly dependent on a lot of external factors and shocks. This can be observed as Jamaica’s current account deficit for the quarter ended March 2020 was US$173.3 million, US$3.8 million worse than what Bank of Jamaica (BOJ) estimated. Given the shutdown of our borders and the implication of COVID-19 on our diaspora, the BOJ is expecting that Jamaica will temporarily breach the sustainability condition due to the fall-out in the tourism sector and decline in remittances, offset marginally by lower imports. The deficit is projected to worsen by more than 5% of GDP to 7.5% of GDP. The recently tabled supplementary budget by the government has Jamaica on track to have a fiscal deficit of J$63 billion for FY 2020/21 due to the decrease in revenue and grants (J$579.9 billion), despite the GOJ lowering recurrent and capital expenditure to J$652.8 billion. What this means for us is lower government spending towards developing Jamaica’s infrastructure which is key driver of economic growth. An example is the postponement Southern Coast Highway which will delay the timely movement of capital between the eastern and southern parishes of the island. We estimate this will also impact the level of real estate developments (both commercial and residential) along this corridor with construction projects being delayed. While this major project has been shelved, it does not mean it will not happen. The priority now for the government is to ensure the economy continues to sustain itself until the global economy recovers and we operate at previous levels of productivity.
In this light, the government was proactive in securing balance of payments (BOP) support of US$520 million from the International Monetary Fund (IMF) with potential financing from other multinationals such as the World Bank. These developments showcase the impact of COVID-19 on Jamaica and how delicate the situation remains as the global economy begins its controlled reopening process. Our borders are expected to reopen to non-nationals on June 15th, which is a positive welcome to the tourism industry, our most significant contributor of USD. While reopening and the removal of stay-at-home orders are necessary steps in ensuring our economy is not permanently damaged, health remains the top priority. The swift approach by our government has been commended by international authorities and feeds our analysis that Jamaica is in stable position currently. Continued health measures must remain for Jamaica not to experience another cluster case in the absence of a vaccine.
The outlook for Jamaica in a post-COVID environment will resemble a healthier Jamaica based on our observations of a wider acceptance of technology, improvement of company operations, increased efficiencies across industries, opening of new supply chains within the region for our local exporters and the collective efforts of our industry technocrats to ensure minimal disruption in our business eco-system. There will be a teething process to get our economy out of the projected contraction of 5.1% by the government, but we believe the environment is conducive for recovery with controlled and prudent fiscal measures. The BOJ has ensured adequate liquidity remains in financial systems by injecting approximately US$338 million between March 2020 and May 2020. Inflation is projected to be tame and closer to the lower end of the BOJ’s inflation target of 4%-6%. The past seven years of Jamaica’s fiscal discipline has positioned us to come out of this global pandemic stronger with the collective support of our citizens, business community, civil society’s and the government. We all have a part to play in enabling Jamaica to enter a post-COVID era confident in our economy and people.
Local Equities Market
For the week ended Friday, Majority of the Jamaica Stock Exchange indexes closed lower than the previous week. The JSE Main Market Index decreased by 0.45%, the JSE All Jamaican Composite Index declined by 0.46%, the JSE Junior Market Index rose by 2.52%, the JSE Combined Index decreased by 0.24% and the JSE USD Equities Index fell by 2.11%. The biggest winner this week is Caribbean Flavours & Fragrance Limited rising by 43.56% to close at J$14.50. The biggest loser was SSL Venture Capital Jamaica Limited falling by -15.01% to close at J$0.79.
Year to date, all the major equity indexes are still down by high double digits (see, the table below); but the trend has been upwards compared to the March lows.
Majority of listed companies have released their earnings for the March 2020 quarter which the general tone being one of underperformance relative to the previous year. Even though Management across multiple industries has suffered from the impact COVID-19 has had on their performance, on average companies have only experienced two weeks of operating during the economic lockdown. For this reason, we expect companies’ earnings for the June 2020 quarter results to show the true extent of the disruption caused by the economic lockdown.
|JSE Main Market|
|JSE Junior Market|
|JSE Combined Market|
|JSE USD Equities Market|
The pandemic has not only exposed vulnerabilities but has also highlighted the need for specific changes, for instance, with the latest economic projections revealing contractions for gross domestic product, Jamaica Manufacturers and Exporters Association (JMEA) has expressed their plans to diversify the economic base by implementing policies to expand the productive sector and drive exports. We view this to be an imperative going forward as the manufacturing sector has over the years consistently contributed around 8.5% to GDP and will play a crucial role in the growth recovery agenda.
With the phased reopening of the economy being implemented with a focus on preventing another spike in cases, we divert our attention to our tourism sector, which is set to open on June 15. This sector is the most likely to bring about new cases, so it is imperative that the Jamaica Hotel and Tourist Association collaborate with the Government to issue strict adherence to health protocols to prevent any resurgence of COVID-19. The reality is that the country cannot afford another quarter with this magnitude of the decline, and it is imperative that we get our economy going again.
Our financial sector is expected to continue underperforming as asset prices remain depressed, and the lower level of productivity will impact their loan books with higher Non- Performing Loan levels within the coming June quarter.
The worst may be behind us, but the lingering effects remain, and the situation is still a volatile one. It is within that context that we remind our clients that the equity market is predominantly for individuals with a high-risk tolerance. These clients are better suited for the volatility within the equities market as the situation may change instantaneously, and capital appreciation or depreciation is correlated with the movements of the market.
|Euro Stoxx 50|
The main focus for the week ending June 12, 2020, was the Fed Statement, which is the primary tool the US central bank uses to communicate with investors about monetary policy. The Federal Reserve Board depicted a US economy that remains fragile and vulnerable and interest rates that remain near zero for at least the next two-and- a-half years. In addition, they projected a 6.5% contraction in real GDP this year, 5% growth in 2021 and 3.5% in 2022 and an unemployment rate of 9.5% in the final three months of this year, 6.5% next year and 5.5% in 2022.
To sum up the Feds’ GDP projections, by the end of 2022, the US economy will only be slightly larger than it was last year before the pandemic. This does not reflect the “V-shaped” recovery that the stock market and a lot of market analyst was pricing in, and because of this, the markets reacted with vast amounts of uncertainty. The Feds projections on unemployment of 5.5% in 2022 compared to 3.7% last year also douse optimism of those who saw the job numbers were evidence that V- shaped recovery was underway.
- US Consumer sentiment beats expectations, 78.9 vs 75.0 expected. The index rise showed that a growing share of U.S. consumers expected the economy to improve.
- Eurozone April industrial production -17% vs -18.5% month over month expected. Those are awful numbers; however, it isn’t surprising as we know that April is the worst month in terms of economic activity due to widespread lockdown measures.
- The growing warnings about a possible second wave of the coronavirus gained some urgency when an official in Houston said they are getting close to re-imposing stay at home orders. In Florida, the seven-day total of new cases is the highest since the pandemic began, 2.8% vs 2.0%. However, California cases were a bit lower than the 7-day average at 1.9% vs 2.2%.
- The Crude market had a stressful week, with Thursdays 8.2% drop in West Texas Intermediate as OPEC and its allies reach a deal to cut oil production through July. Thursday saw a record outflow of more than US$128 million forms the Wisdoms Tree’s WTI Crude Oil ETF, one of the largest crude funds.
- Comment by China’s vice finance minister, Xu Hongcai, China will set up a special transfer payment of 2 trillion in funds for local government to support employment and consumption.
We continue to observe opportunities in U.S. equities and global bond market, given that the rebound has appeared to be pricing in a more optimistic future as a ‘V shape” recovery became less apparent as the Fed announced their economic outlook. We continue to firm up our thesis on an economic rebound locally which we expect to occur after investors have digested the full impact to the company’s June quarter earnings. As our tourism sector is scheduled to open on June 15, we could see people starting to take vacations. That means, we would be keeping a close watch on CPJ, Express Catering Limited and Wisynco Group Limited given that they would be direct beneficiaries of our hypothesis panning out. Our long-term outlook remains positive based on our estimates that the economy will recover on the back of the adaptive capacity of businesses, their embracing of technology, extensive support from multinational entities and a potential vaccination against this virus. The economy has historically been able to adapt to a new life after every global pandemic with the aid of a vaccine and innovation of businesses and consumers.
Local Economic Conditions
USD Foreign Exchange Market
The Jamaican Dollar appreciated against all major currencies last week. Our local currency appreciated 0.45% against the U.S. Dollar week on week to settle at $140.72 as at close of trade Friday, relative to J$141.35 per US$1.00 at the end of the prior closed the period at 6.15%.
Since the outbreak of the COVID-19, the Bank of Jamaica (BOJ) has been proactive in providing adequate liquidity support to our local institutions. However, this has been difficult especially seeing that manufacturers and importers have been demanding additional foreign exchange to purchase raw materials to carry out their business in preparations for the upcoming hurricane season, as well as market players engaging in precautionary purchasing.
As investors have improved knowledge of COVID-19 and are not as risk-averse, we observe a reduced demand for USD as a safe haven, weaken the currency, which translates to an appreciation of our local currency. While we do not expect the previous levels of inflows of USD to return, we assume that the overwhelming demand pressure will be eased, especially given the level of policy measures implemented by the BOJ to ensure adequate liquidity.
Unit Trust Performance
|Unit Trust Fund|
|1 Year Return||Yield|
|FX Bond Portfolio (US$)|
|Real Estate Portfolio|
|FX Growth Portfolio|
The Money Market Fund decreased 0.89% week-on-week, the FX Bond Portfolio increased 0.59% in value, the F.X. Growth Portfolio increased 2.31% in value, and the Real Estate Portfolio decreased 12.71% in value. The Capital Growth Fund increased by 0.06% week over week.
Barita’s Collective Investment Schemes (“CIS”) offer the opportunity for investors to remain invested in the market at this delicate stage of the market cycle; moreover, there is a diversification benefit and opportunity to have a professional portfolio manager make the best-in-class professional judgements on your behalf.
The F.X. Growth Fund which is benchmarked against the S&P 500 has been performing better than the benchmark, which is still down year to date by -5.98%, but, having grown by 0.2.31% last week. This fund helps investors to gain exposure to the U.S. equities market, without taking on the risk of directly investing in a single company.
The Capital Growth Fund suffered the same fate as our local equity market but remains about the year to date performance of the combined index. This is as attractive as securities were also oversold during the March sell and represented an attractive entry point to be capitalized on. The FX Bond Portfolio remains an attractive fixed-income portfolio, especially taking into consideration the large retreat from emerging market (E.M.) securities. With investors seeking “safe haven” in a more developed market (D.M.) securities and essentially selling down their positions in E.M. securities, opportunities were exposed for our fund managers to capitalize on.
The Federal Reserve Board depicted a US economy that remains fragile and vulnerable and interest rates that remain near zero for at least the next two-and-a- half years. In addition, they projected a 6.5% percent contraction in real GDP this year, 5% growth in 2021 and 3.5% in 2022 and an unemployment rate of 9.5% in the final three months of this year, 6.5% next year and 5.5% in 2022.
For our local equity market, we expect companies’ earnings for the June 2020 quarter results to show the true extent of the disruption caused by the economic lockdown.
A recovery is in sight, but it’s a delicate situation that needs continued oversight and constant monitoring. While the outlook past 2020 remains positive, a lot of that depends on how well economies can structure some semblance of stability within the remainder of 2020 without risking any further erosion of health care infrastructures. Global trade as well needs to reopen smoothly and efficiently for large scale economic growth to be sustained.
The reopening of our domestic borders and an uptick in productivity are positive news, but Jamaica has a long-way to go to climb our way out of the projected downturn. We are in a much better position compared to historically which gives us great confidence in a strong recovery, but this can only be achieved with deliberate and measured fiscal prudence by the government and a full buy-in of all members of the economy.
Stock Market Weekly Report
June 12, 2020 – Download here