Weekly Report – May 29, 2020

After the Great Lockdown comes the Reopening

Haughton Richards, Senior Research Analyst

Since the outbreak of the novel coronavirus (COVID-19) in December, the global economy has been at war with an invisible enemy that impacts individuals and indirectly the economy. Fast-forwarding to March, there was a wide-scale closure of international borders to prevent importation of the virus. Stay-at-home orders were issued by differing governments, as a way to combat the pandemic outbreak. These health measures had negative implications on the economy, with specific industries such as the airlines industry being a primary victim of these measures. Global equities and fixed income markets suffered as well as there was a ‘sell-off’ at a magnitude never seen before as investors retreated to ‘safe-heavens’ in U.S. Treasury Bills on the fixed income side and non-cyclical type equities.

Fast forwarding to today, we’ve seen extensive fiscal and monetary measures by multinationals and governments alike to sustain some level of productivity. While a vaccine isn’t readily available, keeping the economy closed indefinitely will surely lead to irreparable damage. As such, there has been issued guidance by international health authorities about appropriate measures that need to be in place to allow or the reopening of economies. What we have observed within the recent weeks is resurgence of economic activity. This can be observed with key indicators the reported increase in global online airline bookings as the summer vacation period reopens. Multiple airliners and the Transportation Security Administration (TSA) have begun releasing information showcasing improving booking levels, while below historical levels, it’s a positive indicators. Cruiseliners have also reported an increase in reported bookings for cruises over the summer period. United States, European economies have reopened restaurants and salons with strict social distancing guidelines, and tourisms dependent Caribbean countries have issued border reopening dates. All these developments in isolation may give indicators of how individual nations have remerged from The Global Lockdown but collectively, they indicated a reopening is approaching.

Not withstanding the aforementioned, the recent protest over the last 5 days due to social injustices being experienced among citizens, has led to concerns of potentially a second wave of the COVID-19. Curfews were imposed to detour protestors, but the mass gathering amongst different states poses a threat to the flattening of the curve. Also this impacts the potential reopening that was underway, as companies such as Target and Apple have indicated they will delay the reopening of some stores until this unrest is subdued. This unrest came at a particular time as the U.S. economy was on the cusp of setting the parameters which would have guided a recovery from the shuttering of business and activity.

With all things considered, the U.S. economy Is starting to show some initial signs of increased activity as business reopen. We are observing that people are willing to travel a little more and US retails sales have begun to pick up, especially in areas where restrictions have been lifted. The current unrest happening within the U.S. will impact the actual reopening process, as we may see a spike in cases remerging which will may delay the reopening process. 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 defensively position their portfolios with solid companies on the equities side, and, in the fixed income space fiscally prudent corporate and sovereign issuers.

 

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 1.67%, the JSE All Jamaican Composite Index increased by 1.65%, the JSE Junior Market Index increased 3.39%, the JSE Combined Index increased by 1.79%, , and the JSE USD Equities Index decreased by 0.05%. The biggest winner this week is Wigton Windfarm Limited, rising by 29.10% to close at J$0.94. The biggest loser was ISP Financial Services Limited falling by -14.68% to close at J$13.00.

Year to date all the major equity indexes are still down by high double digits (see, table below), however, the Junior market has rebounded by 22.26% from the March 23rd lows relative to 7.54% from the JSE main index.

Investors are eyeing Jamaica’s attempt to reopening our economy as work from home orders expire on June 1, 2020. Jamaica’s efforts to flatten the curve has proven to be quite fruitful considering the outbreak from our BPO sector. However, the fight against the coronavirus will likely intensify as we jump start our tourism sector. We must find a way to coexist with the virus and this is what we believe investors are anxiously awaiting to see. They are uncertain on the pace at which the economy will rebound and what will be the full economic implications of the partial economic shutdown still in effect.

Index

5/29/20205/22/202012/31/2019Week/WeekYear-to-Date
JSE Main Market

383,649.98

377,364.54

509,916.441.67%

-24.76%

JSE Junior Market

2,632.97

2,546.69

    3,348.97

3.39%

-21.38%

JSE Combined Market

381,313.59

374,604.23

505,253.98

1.79%

-24.53%

JSE USD Equities Market

190.29

190.39

      226.23

-0.05%

-15.89%

 

In light of this turmoil, we still anticipate that 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 team, record of sustainable earnings growth and to think long-term. In that regard, we continue to like the following companies as compelling buys:

But there are those of you just 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.

 

International Developments?

The U.S. economy Is starting to show some initial signs of increased activity as business reopen. We are observing that people are willing to travel a little more and US retails sales have begun to pick up, especially in areas where restrictions have been lifted. 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. However, the positive tone in risk assets evaporated on when President Trump announced that the Unites States will end preferential treatment towards Hong Kong with regards to trade and travel, this is in response to China’s new security law that affects Hong Kong. Essentially, the market ignored another 2.1 million jobless claims and some of the worst durable goods orders and GDP reports on record but instead reacted to Trump’s announcement. 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 believe investors are a tad bit optimistic in expecting a quicker rebound compared to the financial crisis as unemployment is forecast to rise to nearly 20% in next month’s non-farm payrolls report. That’s double the figures in the financial crisis, and it took 3 years to get back to 7%, 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.

Index5/29/20205/22/202012/31/2019Week/WeekYear-to-Date
Dow Jones

25,383.11

24,465.16
28,462.143.75%-10.82%
S&P 500

3,044.31

2,955.45
3,234.853.01%-5.89%
NASDAQ 100

9,555.52

9,413.99
8,733.071.50%9.42%
FTSE 100

6,076.60

5,993.28
7,542.441.39%-19.43%
Euro Stoxx 50

3,050.20

2,971.35
3,748.472.65%-18.63%

 

 

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, 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 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 Pair5/29/20205/22/202012/31/2019Week/WeekYear-to-Date
JMD: USD143.49144.33132.570.58%-8.24%
JMD:CAD104.96104.50100.70-0.44%-4.23%
JMD:GBP179.08174.06170.64-2.89%-4.95%

The local currency depreciated 0.58% against the US Dollar week on week to settle at $143.49 as at close of trade Friday, relative to J$144.33 per US$1.00 at the end of the prior week. As a result, year to date devaluation closed the period at 8.24%.

Expectedly, depreciation of the JMD relative to US dollar has been a concern for businesses, especially manufacturers. The Bank of Jamaica (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. In addition to this the BOJ readies for launch of electronic foreign exchange trading platform. The platform will facilitate real time electronic FX trading and observation of trades between all authorized FX traders – namely Deposit Taking Institutions (DTI’s), and cambios for the USD/JMD currency pair.

With the uncertainty sounding the pandemic, investors have sought haven in the Green back (US dollar) which is a perfectly normal reaction in a risk off environment. This ongoing refuge in the Green back has strengthen the currency against most major currencies including our JMD and will continue to do so unless the overall tone of the market changes. Last week US markets rallied and as a result we see that the JMD has appreciated by 0.58%. 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.

Unit Trust Performance

Unit Trust Fund5/29/20205/22/2020Week/Week
Return
Year-to-Date
Return
1 Year ReturnYield
Capital Growth

78.3047

77.640.86%-19.10%0.32% –
Money Market

14.469

14.7007-1.58%0.72%2.34%2.07%
Income Portfolio100.00100.002.25%
FX Bond Portfolio (US$)

1.2720

1.26550.51%-5.22%1.24%2.73%
Real Estate Portfolio

6,975.24

7,143.12-2.35%35.58%33.39%
FX Growth Portfolio

0.8686

0.8680
0.07%-3.03%3.20%

Barita’s fixed income unit trust funds as at May 29, 2020. The Money Market Fund decreased 1.58% week-on-week, the FX Bond Portfolio increased 0.51% in value, the FX Growth Portfolio increased 0.07% in value and the Real Estate Portfolio decreased 2.35% in value. The Capital Growth Fund increased 0.86% 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 FX Growth Fund which is benchmarked against the S&P 500 has been performing better than benchmark, which is still down year to date by -5.89%, but, having grown by 3.01% 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 out 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 (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 compliments our outlook on the fixed income market.

Conclusions

Local business in Jamaica has begun re-establishing a semblance of business activity. This we observe as business are now opening for longer, accommodating sit-ins at their establishment and other posturing’s to accommodate new business hours and activity. All establishments will have to adhere to the Ministry of Health & Wellness (MOH) guidelines which stipulate specific guidelines around social distancing and sanitary measures.

With all things considered, the U.S. economy Is starting to show some initial signs of increased activity as business reopen. We are observing that people are willing to travel a little more and US retails sales have begun to pick up, especially in areas where restrictions have been lifted. The current unrest happening within the U.S. will impact the actual reopening process, as we may see a spike in cases remerging which will may delay the reopening process. 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 defensively position their portfolios 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 the 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

May 29, 2020 – Download here

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