Weekly Report – May 22, 2020

Local Equities Present Opportunities Amidst the Uncertainty

While the US equity indexes have charted a rip-roaring snapback from the March 23rd lows, our local equities market has not followed a similarly frenetic rebound. Year to date all the equity indexes are still down by high double digits (see, table below), but, it’s interesting to note that the Junior market has rebounded by 18.20% from the March 23rd lows relative to 5.80% from the JSE main index.

However, the rebound has not necessarily been even, considering that 138 Student Living has been driving much of the movement in the Junior Market index, having risen more than 70% year to date and most recently IronRock Insurance Limited, which rose 42.28% last week. This signals that much of the ‘smart money’ in the market is weighing the uncertainty in the macro environment, in particular investors are thinking about when Jamaica will likely reopen to accept tourists, and what will be the full economic implications of the partial economic shutdown still in effect.

Index

5/22/20205/15/202012/31/2019Week/WeekYear-to-Date
JSE Main Market

377,364.54

375,066.49

509,916.440.16%

-25.99%

JSE Junior Market

2,546.69

2,444.99

    3,348.97

4.16%

-23.96%

JSE Combined Market

374,604.23

371,399.39

505,253.98

0.86%

-25.86%

JSE USD Equities Market

190.39

186.97

      226.23

1.83%

-15.843%

 

This means, the market will likely be range bound over the next 3 to 6 months, and to play this outlook requires investors’ active portfolio management and stock selection in order to see any above average returns.

We continue to advise our clients to position in companies with strong balance sheets, experienced and proven management teams, a record of sustainable earnings growth and to think long-term. In that regard, we continue to like the following companies:

But, there are those of you that do not have the time and perhaps the knowledge to actively manage your portfolio, especially at such a delicate stage of the economy cycle. For those individuals, we continue to recommend our Cap Growth Fund, which is designed to take advantage of the very opportunities now before us to generate above average returns for our clients.

 

Is the Worst Over in International Markets?

All the major equity indexes in the US continue to post gains week-over-week, with investors betting that the re-opening of the US economy will reverse the horrible unemployment figures and that a vaccine could be found by 2020 or early 2021.

There are also some early signs of an ‘economic bottom’ being in place, when we look at purchasing managers indices (PMI) that have started to turn upwards, and so too is consumer sentiment. This positive outlook has now buoyed the S&P500 above its 200-day moving average.

Index5/22/20205/15/202012/31/2019Week/WeekYear-to-Date
Dow Jones

24,465.16

23,685.42
28,462.143.29%-14.04%
S&P 500

2,955.45

2,863.70
3,234.853.20%-8.64%
NASDAQ 100

9,413.99

9,152.64
8,733.072.86%7.80%
FTSE 100

5,993.28

5,799.77
7,542.443.34%-20.54%
Euro Stoxx 50

2,971.35

2,770.70
3,748.477.24%-20.73%

 

However, we caution that we are still not out of the woods given the risks associated from a hurried reopening of the US economy and what that might mean for markets should there be a second wave of COVID-19 infections. We are also closely watching the Chinese-American geopolitical standoff, which, if it escalates, could force markets to attempt a retest of the March 23rd lows. This new ‘China bashing’ from the President Donald Trump is likely to trim some of the bullishness on US equities and could possibly lead to some consolidation and range-bound trading over the next couple months.

There are other headwinds that we are watching including the growing number of corporate bankruptcies. We are observing an increasing number of bankruptcy filings, mainly Chapter 11s, which focuses on restructuring of debt. While this doesn’t directly imply that business have completely gone kaput, it does give a good indication of the economic impact businesses are facing. Prominent businesses such as Hertz, JCPenney and Chesapeake Energy which span the hospitality, retail and energy sectors, by our estimate, are those most heavily exposed to the curtailment measures implemented to combat the virus.

We see opportunities in US equities, given that the rebound has been bifurcated, that is, the median S&P500 companies, are still down by double digits year to date. 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 CPJ and Express Catering 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 adaptive capacity of businesses, their embracing of technology, extensive support from multi-national 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 Pair5/22/20205/15/202012/31/2019Week/WeekYear-to-Date
JMD: USD144.33147.12132.571.89%-8.87%
JMD:CAD104.50106.32100.701.71%-3.78%
JMD:GBP174.06179.59170.643.08%-2.01%

Currency Pair 22/5/2020 15/5/2020 31/12/2019 Week/Week Year-to-Date JMD: USD 144.33 147.12 132.57 1.89% -8.87% JMD:CAD 104.50 106.32 100.70 1.71% -3.78% JMD:GBP 174.06 179.59 170.64 3.08% -2.01

Expectedly, depreciation of the JMD relative to US dollar has been top of mind for businesses especially manufacturers and for the popular business press. The concern is about further depreciation of the JMD, which is down -8.87% year to date. The BOJ has tried to manage the underlying causes of the depreciation through various mechanisms. Such operations include lowering of the cash reserve requirements, issuing of a USD Indexed Note and offering a special USD repurchasing program. The IMF has also approved more than US$520 million to Jamaica under the Rapid Financing Instrument, which help in supporting Jamaica’s Balance of Payments (BOP). The measures by the BOJ is expected to release approximately US$547.42 million into the FX market.

In an ideal world, market participants would accept that the price of the currency pair is market determined and consequently is likely to naturally ebb and flow. However, the market appears to be reverting to historical norms in the Jamaican investment landscape, which is, to pile into US dollars. We also cannot ignore the impact that market players of significant size and scale and their portfolio positions and decisions can influence two-way volatility in the market. Consequently, until the tourism market reopens meaningfully, and remittances begin to bounce back, we could still see further depreciation of the JMD relative to the USD, even within bouts of appreciation.

 

SecurityDiv/ShareRecord DateX DatePayment
MILJ$0.12522-May-2021-May-201-Jul-20
SVLJ$0.002518-May-2015-May-2012-Jun-20
MJEJ$0.0612-May-2011-May-2026-Jun-20

Unit Trust Performance

Unit Trust Fund5/22/20205/14/2020Week/Week
Return
Year-to-Date
Return
1 Year ReturnYield
Capital Growth

77.6399

77.94-0.39%-19.79%0.65% –
Money Market

14.7007

14.63580.44%2.33%3.92%2.11%
Income Portfolio100.00100.002.25%
FX Bond Portfolio (US$)

1.2655

1.25890.52%-5.71%0.82%2.74%
Real Estate Portfolio

7,143.12

6,202.8115.16%38.84%36.64%
FX Growth Portfolio

0.8680

0.8474
2.43%-3.10%0.14%

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 FX 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 -8.64%, but, having grown by 2.43% last week. This fund helps investors to gain exposure to the US 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 above the year to date performance of the combined index. This is attractive as securities were also oversold during the March sell-off 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 (EM) securities. With investors seeking “safe haven” in more developed market (DM) securities and essentially selling down their positions in EM securities, opportunities were exposed for our fund managers to capitalize on. A lot of attractive credits became “cheaper” to obtain which we believe complements our outlook on the fixed income market.

Conclusions

While improvements in the underlying macroeconomies globally are becoming more evident, we are still not out of the woods; therefore, we caution clients to take a risk-on sentiment, but only within a defensively positioned their portfolio with solid companies on the equities side, and, in the fixed income space, fiscally prudent corporate and sovereign issuers;

Let professional portfolio managers help in managing the individual or idiosyncratic risk from investing in a single stock, by pooling with other investors. With 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

May 22, 2020 – Download here

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