JAMAICAN STOCK MARKET
Stocks start year
in buoyant mood

Similar to last year, the stock market began 1997 in its customary fashion, rising on renewed optimism for the year ahead. Recent reductions in the repo rate from 31% to 27% provided added stimulus.
On the first trading day this year, the index advanced by 828 points to close at 17,444 points and of some 20 stocks traded, 12 advanced. Dyoll Group was the only stock to decline.

But in spite of the advance, analysts do not expect the strong bull run to last to the end of this quarter. The stock market is said to be responding to specific outcomes, such as the recent fall in the repo rate, just like it did in September, when the rate fell from 35% to 31%. The main concern is the lack of sustained demand due to the absence of institutional investors.

Market analyst, Claudette Crooks, of brokers Edward Gayle & Company, predicts continued fluctuation up until about March, with no real sustained uplift. She advises investors to look out for Blue Chip stocks with low price/earnings ratios.

Corporate news

Pulse Investments' unaudited results for the year ended June 1996 saw operating revenue doubling to $42.7 million, contributing nearly $9 million to the bottom line. This compares with audited profits of $5 million the year before.

Monetary issues

The Bank of Jamaica (BoJ) started with a feather in its cap for the new year, as 1996 ended with two highly successful public offerings. The offerings added to the confidence in the monetary system and reinforced the the effectiveness of the tight monetary policy being pursued by the Central Bank. The BoJ came to the market in early December with a three-series Local Registered Stock (LRS) offer.

As expected, its two-year, eight-month variable rate instrument was quickly gobbled up. This was largely because the issue qualified as part of the liquid assets that commercial banks are required to keep by law, as well as its attractive return of 1.50 percentage points above the Treasury Bill yield.

The $2 billion offer was so successful that the Central Bank was forced to close applications after only four days. However, the other two three-year fixed rate and six-year eight-month issues were not so warmly embraced by the market as the commercial banks were paying more competitive yields for similar periods.

This is especially the case with the fixed rate instrument that paid 27.5 percent, as commercial bank certificates of deposit were paying 32 percent. Reviewing the situation, the Central Bank stepped in and chopped two percentage points off its repo rate, sending a definite signal that rates were falling.

The significance of this is that investors are anxious to lock into long-term instruments that pay attractive yields, if they are convinced that rates are likely to continue falling.
As a result, the fixed rate three-year instrument was over-subscribed by 120 percent, attracting $2.3B. BoJ will no doubt be very encouraged by these results, as only weeks before, its two unlimited LRS issues raised only $2.5B in a similar market of declining rates.

There is a feeling in financial circles that this latest trend of falling interest rates is likely to continue further into 1997, in line with the continuous improvement in the inflation rate.
A positive aspect of these LRS results is that the Central Bank will be able to take $5B out of the system for an extended period. This will give the Authorities greater scope in planning to meet its interest payments, spread over a long period.

This is a far cry from what existed some 12-18 months ago when only 30 to 60-day instruments were issued, forcing the Central Bank to constantly increase rates in order to induce investors to leave their funds with the Bank of Jamaica.
Naturally, most maturity periods of these short-dated instruments coincided with rate increases.
Another positive impact is that longer-term investors benefit from the larger yield. Also, their willingness to take up the offers indicates greater confidence in the monetary system and current macro-economic policies.

1997 forecast

Financial analysts were upbeat about expectations for the new year, particularly as some new listings are expected to deepen and widen the market. However, as a pre-requisite for a strong market by year-end, most analysts agree that inflation, interest rates and the exchange rate must continue on their current trend.

This, coupled with expected better economic growth and a more stable dollar, sets the basis for a promising year for the financial markets in 1997.
Predictions are for commercial lending rates to remain between 32 and 42 percent to year end - if the prevailing cash and liquid reserve requirements are kept in tact. By this time, companies will have recovered from the high interest rates prevailing in the system, thus releasing funds for product development and profits, rather than just cutting costs.

As interest rates continue to fall, the stock market will become more attractive and a boost should be expected as 1997 comes to a close. One analyst even predicts that with a stable exchange rate and falling inflation /interest rates, the stock market could climb to the 20,000 point level by the end of this year.

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