Weekly Report – June 5, 2020

New Bull Market or Something else?

Jonathan Cook, Research Analyst

The Coronavirus pandemic has had a devastating impact on the global economy. While it is certain that the effects of the pandemic will take some time to heal, the stock market has already recovered a significant portion of its losses, where S&P 500 has rebounded by 43% from the March 23rd lows. However, our stock market Combined Index has only rebounded by 7.52% from the March 23rd lows. The US stock market rally took place in a brief period, especially seeing that the global economic outlook is still under development in a post-COVID era with countries in the process of restarting their economies. So, is the recent rebound in the U.S. stock market a bear market rally or are we in full recovery? First, let us explain what a bear market is. A bear market is commonly defined as a 20% decline in the stock market from an all-time high. A bear market rally refers to a sharp short-term price increase in a stock or market amid a longer-term bear market period. As history has shown us, bear market rallies can go on for weeks, even months before the market continues to head to recent market lows. According to Bloomberg, bear market rallies since the end of 1927 had lasted an average of 627 days before indexes dropped lower and bottomed out. To this end, history has taught us that it is quite difficult to determine a bear market rally. 

Now the U.S. stock market has rallied as investors expect a swift economic recovery. Their expectations are not only based on the fiscal and monetary policies put in place to help support the economy but also because they have improved information on COVID-19. One of the lessons we learned was that COVID-19 was not as risky for everyone. There are incredibly high-risk groups where age and pre-existing health conditions impact the severity of the virus. However, the stock market’s movement has been disconnected from the historical low economic data. Once it became apparent that many companies would continue to operate, but largely from home, investors bought stocks that benefited from that. Tech stocks have since driven major US indexes as investors crowded into popular names including FacebookApple, Microsoft, and Google. This bias has caused the stock market to react in ways that do not reflect the real economy. Even so, after a crisis, investors are usually defensively positioned. As their confidence grows, they begin to rotate into other sectors such as early cyclical, then into full risk-on mode into consumer discretionary, commodities etc. 

The U.S. economy has taken a severe blow and will take some time to recover. Despite this, the stock markets are forward-looking in the sense that investors buy and sell stocks not based on what happened yesterday or what is happening today but instead based on their expectations for the future. 

Our local companies suffered the same fate as the global environment with Jamaica essentially closing its borders in March and implementing stay-at-home orders and curfews. Now, like the U.S., we are taking precautionary steps in reopening our economy. So why hasn’t our local market rallied behind the U.S. market? Notably, our market lacks the liquidity as well as the far-reaching monetary and fiscal measures that the U.S. possesses. For this reason, our investors are cautious as they should be. First-quarter earnings have only been impacted by two weeks of operations during the economic lockdown, which is why we believe investors may potentially be waiting on second-quarter earnings to fully assess the impact of the economic lockdown. Now, if it becomes evident that the U.S. market is experiencing a bear market rally, that could apply additional downward pressure on our equity prices as a risk-off tone spills over into our equity market. However, we don’t expect it to have a significant effect, as our markets have not rallied and are therefore in a better position to handle risk-off events.

We urge investors not to worry about missing out on what might be the recovery but instead to take extra time to assess their portfolios and determine how much risk they can handle.  When situations of heightened uncertainty arise, the best defence is to be as well informed as possible. Some investors might go on the offensive and search for companies with strong balance sheets, experienced and proven management team and a record of sustainable earnings growth that will lead to great returns when things turnaround. Those who want to mitigate uncertainty and risk might be content with leaving their money in safer securities such as money market fixed-income securities. Regardless of which strategy you decide to take, you can’t go wrong over the long term by keeping yourself well informed. But some investors do not have the time and perhaps the knowledge to actively manage their portfolio, especially at such a delicate stage of the economic cycle. For those individuals, we continue to recommend both our Capital Growth Fund and F.X. Growth Fund for investors with large risk appetite and our FX Bond Fund for the more risk-averse, which are both designed to take advantage of the very opportunities now before us to generate above-average returns for our clients

 

Local Equities Market

For the week ended Friday, Majority of the Jamaica Stock Exchange indexes closed higher than the previous week. The JSE Main Market Index increased by 0.73%, the JSE All Jamaican Composite Index increased by 0.76%, the JSE Junior Market Index rose by 3.37%, the JSE Combined Index increased by 0.91%, and the JSE USD Equities Index increased by 0.27%. The biggest winner this week is SSL Venture Capital Jamaica Limited rising by 24.0% to close at J$093. The biggest loser was Wigton Windfarm Limited falling by -17.02% to close at J$0.78.

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. Management across multiple industries have stated the impact COVID-19 has had on their performance and the expected underperformance of businesses with borders remaining closed and the extension of curfew hours restricting usual business hours. For our local manufacturers, while borders are expected to reopen this month to international travellers, stay-at-home orders have been lifted, and schools expected to resume in September, local entities have stated that the economic activity would have to return to at least 60% to absorb the current supply in inventory by these businesses. Financial stocks could  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. But, as the economy rebounds into 2021, these sectors are likely to rebound strongly. Therefore, now could be an opportunity to pick up good companies at cheap prices.

Index

6/5/20205/29/202012/31/2019Week/WeekYear-to-Date
JSE Main Market

380,836.95

383,649.98

509,916.440.73%

-25.31%

JSE Junior Market

2,549.07

2,632.97

    3,348.97

3.19%

-23.88%

JSE Combined Market

377,825.58

381,313.59

505,253.98

0.91%

-25.22%

JSE USD Equities Market

190.80

190.29

      226.23

0.27%

-15.56%

 

 

With the phased reopening of the economy being implemented with a focus on preventing another spike in cases, we expect the earnings of our listed companies to continue being below previous year levels. While the impact of COVID-19 will surely play a role in the company’s performance for the remainder of the year, we may be optimistic that the underlying economics of companies remain intact.

 

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.

 

International Developments

Index6/5/20205/29/202012/31/2019Week/WeekYear-to-Date
Dow Jones

27,110.98

25,383.11
28,462.146.81%-4.75%
S&P 500

3,193.93

3,044.31
3,234.854.91%-1.26%
NASDAQ 100

9,824.39

9,555.52
8,733.072.81%12.50%
FTSE 100

6,484.30

6,076.60
7,542.446.71%-14.03%
Euro Stoxx 50

3,384.29

3,050.20
3,748.4710.95%-9.72%

Given the shutdown of the global economy to curtail the spread of COVID-19, supply-chains were eroded, and demand weakened. In light of the recent reopening developments among major economies, oil prices have been trending positively as plans for reopening has reignited demand for this product. Also, this the Organization of the Petroleum Exporting Countries and its allies (OPEC+) will be meeting to discuss further production cuts. With oil storages globally being near-maximum-capacity, the reopening of economies will introduce need consumption of services and products for which oil and its by-products will be in demand. While globally we are not out of the woods given the risks associated from a misstep in the reopening of the global economy and what that might mean for markets should there be a second wave of COVID-19 infections. We believe investors remain optimistic as May Non-Farm payroll levels came in at 13.3%, lower than the expected 19.8% predicted by economists. 

We continue to observe opportunities in U.S. equities and global bond market, given that the rebound has been bifurcated, that is, the median S&P500 companies, are still down by double digits year to date and credit spreads remain wide relative to pre-COVID levels. But, we are also watching, to firm up our thesis on a local rebound, the continued medical and financial health of the American consumer.  To the extent that consumers come through with their incomes intact and the residual amounts from the fiscal stimulus still available for consumption, we could see Americans taking vacations to regions such as Jamaica that have not been as severely affected compared to elsewhere. That means, we would be keeping a close watch on 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

Currency Pair6/5/20205/29/202012/31/2019Week/WeekYear-to-Date
JMD: USD141.35143.49132.571.49%-6.63%
JMD:CAD106.33104.96100.70-1.31%-5.59%
JMD:GBP181.47179.08170.64-1.34%-6.35%

The local currency depreciated 1.49% against the U.S. Dollar week on week to settle at $141.35 as at close of trade Friday, relative to J$143.49 per US$1.00 at the end of the prior week. As a result, year to date devaluation closed the period at 6.63%.

Since the outbreak of the COVID-19 on our shores and the closures of our border, the Bank of Jamaica (BOJ) has been proactive in providing adequate liquidity support to our local institutions. As at April, the BOJ has injected over J$34 billion into our market. The funds are being used to ensure that the integrity of our financial market remains intact while allowing Deposit-Taking Institutions (DTIs) to provide the necessary capital to our domestic companies.

In light of indications of a planned phased reopening of our borders, we expect that the level of F.X. volatility we saw in March and April will subside as uncertainty retreats from the market. While we do not expect the previous levels of inflows of USD to return, we expect 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 Fund6/5/20205/29/2020Week/Week
Return
Year-to-Date
Return
1 Year ReturnYield
Capital Growth

78.0908

78.3047-0.002%-19.31%-1.06% –
Money Market

14.593

14.4690.009%1.39%3.34%2.11%
Income Portfolio100.00100.002.30%
FX Bond Portfolio (US$)

1.2806

1.27200.007%-4.58%2.04%2.42%
Real Estate Portfolio

6,866.34

6,975.24-0.016%33.46%32.10%
FX Growth Portfolio

0.8778

0.8686
0.011%-2.00%6.42%

The Money Market Fund increased 0.009% week-on-week, the FX Bond Portfolio increased 0.007% in value, the F.X. Growth Portfolio increased 0.011% in value, and the Real Estate Portfolio decreased 0.016% in value. The Capital Growth Fund decreased by 0.002% 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 -4.58%, but, having grown by 0.011% 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. A lot of attractive credits became “cheaper” to obtain, which we believe compliments our outlook on the fixed income market. 

 

Conclusions

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. 

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.

Let professional portfolio managers help in managing the individual or idiosyncratic risk from investing in a single stock, by pooling with other investors. With some much uncertainty remaining in the local and international assets markets, the conditions are appropriate for portfolio managers to outperform through their security selection abilities.

Stock Market Weekly Report

June 5, 2020 – Download here

Keep Reading...

Let's Make Your Money Work For You