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Investment community reacts to new COVID-19 measures

The new COVID-19 measures introduced on Sunday last by Prime Minister Andrew Holness have already impacted the Jamaica Stock Exchange (JSE) which has had to reduced trading time to only two hours (9:30 – 11:30) on March 26 and April 1 because of the 12:00 pm closure requirement.

This is in stark contrast to the already short three hours and 30 minutes trading window for trading to occur on the market. The JSE Index has already recorded a 0.73 per cent decline since the announcements made on Sunday to 391,704.70 points. This saw 92 stocks trading during the Tuesday market session with 41 advancing, 36 declining and 15 trading firm. The JSE Index had hit a record three-year low of 342,093.89 on March 25, 2020 in the month which saw the most pronounced decline of 21 per cent.

With all these new measures carrying a new degree of uncertainty since Jamaica is entering a new phase of the pandemic, the Business Observer canvassed the investment landscape to gain some insight into what might happen in the coming months.

Business Observer (BO): How do you expect the market to react to the new measures introduced on Sunday?

Ryan Strachan (RS) – Vice-president of Investor Relations of GK Capital Management Limited: I believe the bouyancy of specific listed companies would have been due to their performance within the past 13 months of the pandemic. Consequently, my concern is less with the market as a whole, and more with the capacity of entities to generate revenues and profits. A shorter window will very likely impair the likelihood of improved performance, but logistics-driven businesses like Mailpac and the vendors own delivery mechanism have filled the gap. I expect this to continue and the impact to go as far as impacts on results. With two weeks to go in the March quarter, I am not assured the impact on the market, if any, will surface in the immediate term.

Johann Heaven (JH) – President and CEO of Proven Wealth Limited: I believe that the market has priced in much of the negative effects of the pandemic including the possibility of further tightening of the measures by the Government and a protracted period for recovery and therefore don’t anticipate that we will see a sell-off or weakening of prices in the short term, even with these new measures.

Daren McGregor (DM) – Assistant Manager of Research at VM Wealth Management Limited: We expect the new measures to drive a paring back of risk in the market, particularly in the entertainment and tourism related stocks. While we do expect to see some re-emergence of interest in companies in the consumer staples space (GK, SEP, LASM). While we expect some softening in the financial stocks, we expect this to be fairly muted in the short-term as investment portfolios continue to stabilize amidst a likely intermittent dip in revenue. Generally, we do expect to see a dip in stocks but not nearly to the degree that we saw last year as the crisis emerged.

Maurice Wright (MW) – Chief Investment Officer at Credit Union Fund Management Company: While there are some undervalued stocks on the Jamaica Stock Exchange (JSE), the volumes on the equities market are likely to be constrained as investors review the profitability of target companies and adopt a wait and see attitude. Notwithstanding the pandemic, liquidity in the market is very high and any initial public offering (IPO) or additional public offering (APO) are likely to be welcomed in the market. This is consistent with the current trend. Companies with high exposure to, or need for, in-person traffic such as the entertainment and fast-food industries will feel the immediate impact of the measures. These companies are expected to face downward pressures on their valuation and prices in the market. Ultimately financial institutions with credit exposure to these industries are likely to see an increase in their expected credit losses in the short term as default risks increase. Companies in the distributive trade and focus on non-discretionary goods are likely to continue to do well.

Sheldon Thomas (ST) – Asset Manager at Stocks and Securities Limited: On the heels of the most recent announcement by the Prime Minister of Jamaica, outlining more stringent measures to manage the effects of COVID-19 on our nation. Jamaicans have been enduring restraints that will create sector strain on some degree of economic activity. The new measures introduced on Sunday last will have a price effect on market value that may result in “risk adjusted value”. The market will in turn adjust positions taken prior to new measures to ensure that the exposure does not implicate or destroy capital.

As a counter measure, the market will continuously react or rely on companies, industries and overarching sectors considered to be Covid -19 proof. All this to firstly, preserve invested capital and secondly, to earn risk adjusted returns through repositioning(s). Economists and seasoned investors will observe and caution in betting on companies that have strived or continuously make margins due to the sector and/or the nature of their business(es). This is also to avoid specific asset bubble locally or placing additional pressure in finding other alternatives beyond the shores of Jamaica for liquidity with greater depth.

BO: With the current situation, how do you expect the economic recovery to be impacted?

RS: The same would be true for the economy as a whole. Manufacturing, finance and construction companies are viewed as essential, so disruption to their operations would be limited based on the current measures. I believe that if a lid can be put on the spread of COVID, and the measures do not become any more stringent, we can reasonably expect a steady recovery. Stronger measures will have the reverse effect.

JH: Economic recovery is expected to be further delayed by the current measures, with reduced economic activity, especially affecting the informal sector and those companies and sectors that are directly linked to this sector including entertainment, tourism, micro-financing and retail. With the heightened uncertainty, the smart money will move to stocks that provide some stability during this period and are best able to weather the storm. There will also be opportunities to invest in those companies that have been heavily affected by the pandemic, as some investors tend to overreact and panic, selling below desired levels and giving opportunity for others to buy at bargain prices.

DM: This is not going to be good, particularly for the tourism and entertainment industries which are still struggling. The likely impact on foreign exchange is a bit less clear as we weigh the decreased inflows from tourism and travel, against the likely impact on demand for the importation of oil and gas products and the buoyancy in remittances following the distribution of the recently approved stimulus package in the US. The magnitude of the impact will be dependent on if these restrictions are allowed to expire, in which case the impact would be transient.

MW: The new measures announced are expected to have a negative impact on commerce in the short term as it will limit the ability of consumers to freely go about their business. While necessary as part of a package of initiatives to curtail the spread of the COVID-19 virus, these measures, in the first instance will, delay the prospects of economic recovery as it will shorten the number of hours of production, distribution and commercial consumption.

The current trajectory could not be allowed to continue as it was clear that a number of people were not following the recommendations that have proven to be a sure way to retard the spread of the virus. In the context of what the country needs to do to prevent the continued spread of the virus, the measures will have a positive effect. These measures must be complemented by strict enforcement of the laws which should result in punishment of offenders with meaningful deterrents. Our short to medium term economic future is highly correlated to how successful we are in controlling the COVID-19 virus hence we will have to be prepared to bear the temporary pain and inconvenience of the measures.

ST: The Jamaican economy has come a far way, we may not even realize it, but our economy has changed significantly from a position of imperceptive to economic theory, lacking in diversity to an economy making an impressionable start, engaging, and building immunity to shocks. The Jamaican economy has begun the much-needed digital transformation for the 21st century! The manufacturing and distribution sector along with the real estate industry are seemingly ahead of the curve in the act of balancing risk and return with strategic precision. This will create opportunities for value investors in forementioned markets, along with commodities, financial and manufacturing sectors. However, if there are unforeseen cracks in the financial industry and with tourism on life support, this may lead to adverse pressures on the manufacturing, distribution, and real estate industries.

The Government will have to continue the delicate balance between fiscal policy and the central bank’s monetary policies throughout this crisis to prevent cracks that may lead to post economic conundrums which once plagued the Island’s economy. This is not a time to panic, but a time to reposition, and pivot for upcoming advantages signalled in the market.

The economic recovery will be favoured to manufacturing, distribution, construction and consumer goods sector. The companies listed on the stock exchange in the aforementioned sector, once efficiencies in terms of supply chain are maintained, should continue grow economically and reflected as such in their respective stock prices while companies listed on the stock exchange different indices overly exposed to tourism and hospitality industry, including transportation, will continue to be negatively impacted.