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The Jamaica Stock Exchange: From calm seas to stormy waters

Brace for more uncertainty! This week, the Jamaica Stock Exchange (JSE) experienced two of its largest point falls. On Thursday, prices fell by 21,152.18 points (4.67 per cent) to close at 432,210.62 after  a larger than usual 12,629.18 points fall on Tuesday. If this alarming volatility has caught your eye as an investor, you are not alone.

The Jamaica Stock Exchange (Photo: bloomberg.com)

The JSE has been the darling of global stock exchanges given the great run it has experienced in the last decade. Now, more than ever, younger Jamaicans are actively investing in the local stock market. This is, in part, as a result of the Government continuing to broaden the ownership base of the economy by divesting State-owned firms via public equity markets. Take, for instance, the listing of Wigton Wind Farm on the Jamaica Stock Exchange using a “bottom-up” distribution approach that prioritised small investors. The result was some 11,000 new investors owning shares in a company listed on the JSE for the 1st time. It was the first listing ever processed with over 31,000 applications.

“People are seeing that the economy is changing and they are hungry for information to help them figure out how to capitalise on the changes…”

– Financial Analyst Marc Gayle

In stark contrast, this week’s massive sell-off is proof of the fear that has gripped many investors in the market. With the novel coronavirus crippling global markets, we can expect companies like Margaritaville, Kingston Wharves, Dolphin Cove and Cargo Handlers among others to report negative financial performance Q1 and possibly Q2 this calendar year, which could potentially lead to a drop in their stock prices. The coronavirus has all but wiped out the manufacturing of goods from China, sent at least one major airline to the brink of bankruptcy and devastated freight and cargo services.  However, to understand what has been happening in the local market, we have to look at other factors, we have to consider other factors, like new offerings such as TransJamaica Highway (TJH) initial public offer and the Proven Investments additional public offer, as well as the need for more financial literacy.

Wigton Windfarm shares have consistently remained above its list price.
(Photo: Jamaica Public Service Company)

After a great 2019, highlighted by the Wigton listing, many were raring to go after some investors experienced a 100 per cent increase in returns on that stock. While the stock has decreased since peaking at over JA$1 per share, it has remained higher than the JA$0.50 it listed for. Back in December 2019, there were rumours of more IPOs to come in 2020 such as Tropical Battery, Alliance Financial Services, First Rock and AJAS Aviation Services. Along with the highly anticipated TransJamaica Highway IPO , these potential listings contributed to a pullback in Q1 of this year as investors were gearing up to invest in these upcoming public offerings.

First Rock, after being oversubscribed, upsized their offering to add 53 million shares. After an early jump, the stock has decreased to well below the offer price of JA$16.67, which means that those investors who were expecting a ‘huge pop’ or increase of more than 50 per cent return in a short time were left disappointed. If, for instance, an investor had borrowed a loan against their portfolio and the gains were below expected, they could feel pressured to either sell some of their stocks or add more equity to keep them from being forced to repay the loan and taking a massive loss.

The listing of First Rock Capital Holdings on the Jamaica Stock Exchange.

According to Financial Analyst Marc Gayle, “The current volatility in the market is largely driven by several factors; Fear (COVID-19), unwinding margin positions, rebalancing of portfolios to prepare for expected listings (TJH) and a lack of financial literacy/sophistication. However, for those investors that have done their homework, have a ‘margin of safety’ and have equity capital they can deploy in times of market pullbacks, they will be able to find great deals, and will be prepared (and likely willing) to ride out two or three-quarters of bad news.”

For some investors, the sell-off is seen as an opportunity to re-invest in some companies. “The market could stabilise in short order, or it could last longer than expected. COVID-19 has added a lot of uncertainty to the sentiment of the markets, that makes it impossible to predict how long this volatility will continue for. Even though a lot of the volatility could initially be attributed to the growing pains associated with market development/deepening, COVID-19 fears have exacerbated it. We see how much more developed and sophisticated markets in the US & London have been plagued by massive volatility due to COVID-19, so it isn’t surprising that we would feel some of those effects as well.”

Randy Rowe, investor and writer for EveryMickle.com, also believes the current market volatility is not linked to any one thing. “The overall JSE index is a reflection of stock prices and TJH has seemed to kick off a decline in quite a few stocks as it’s thought that many investors exited stocks they were in, to buy into TJH. The heavy exiting usually causes a stock’s price to fall as sellers chase what orders are available. It depends on the investor and their view.”

The TransJamaican ipo closed a week early on March 2.

With many new investors in the market, there is still a lot of room for improving their financial literacy. As it all depends on how an investor views the market, the more informed you are the better your decisions. There’s hope yet. There are many initiatives aimed at improving financial literacy, from the JSE increasing their outreach activities, to organic events like ‘Stocks on the Rocks’ hosted by Simon Johnson, and the open & free discussions about finance & economics by the many great young minds on Twitter using the hashtag #FinanceTwitterJA. All of these contribute to a recent substantial push to simplify and share knowledge around financial literacy, investing and the stock markets.

“We have been seeing people of all ages engaging with the financial & economics topics we are discussing via #FinanceTwitterJA. It is also evolving to offline events, classes, soon to be a website and many other things. It is truly an exciting time in Jamaica. People are seeing that the economy is changing and they are hungry for information to help them figure out how to capitalise on the changes so they can begin building generational wealth for themselves and their family. What a time to be alive and participating in the Jamaican economy!” Gayle further explained.

Though stock market volatility is generally associated with investment risk; it can also be used to lock in superior returns on the upside, when the market rebounds. In essence, investors should commit to investing in themselves so they can develop solid strategies that allow them to take advantage of market pullbacks, not just market rallies.