Keith Collister, Gleaner Writer
AS THE stock market continues to languish, analysts continue to remain cautious about the prospects of the equities market. They note that concerns about inflation last year led people to speculate that interest rates were going up and this essentially drove the nail into the coffin of the market.
According to portfolio manager at Pan Caribbean Financial Services, Audrey Williams, institutional investors stayed out of the market last year because "the prices were just too high."
RBTT analyst Mario Watts argued that many investors forgot that local companies had to conform to the International Accounting Standards. In particular, the mark to market valuation requirements made companies' profits look exceptional. This had the effect of shooting up stock prices, moving sharply from 2003 to 2004. He adds: "I think a lot of investors expected that level of performance going forward, which obviously was not the case."
INVESTMENT OF CHOICE
According to Mr. Watts, at that time, stocks became the investment of choice. Individuals sold properties and put their funds into the market "Some people took loans, sold properties, car, real estate and put it into the market."
In his view, everybody was overoptimistic about returns. "There was always something about investments and the stock market in the papers, with the result that most investors expected the momentum of the market to continue into 2005."
The view of veteran stock-broker Vivian Bedassie of NCB Capital Markets was that the stock market is about long-term investment and "having some confidence in the future."
In his view, for some time, both institutional investors and larger individual investors had the perception that the long-term trend of interest rates was down, and that therefore, the outlook for the market would be positive, making stocks the asset class to be in.
The 33 per cent "out of the blue" interest rate in 2003 interrupted this trend, but interest rates soon came back down and therefore investors, based on the fact that the interest rates were still coming down and the fundamentals of the companies were improving, still thought stocks were the asset class to be in during 2004. However, "at the back of the minds of all investors is that this is still an economy that has not grown more than two per cent and has suffered significantly in terms of shocks and can't bear them."
He argues there was a point at which investors were intending to get out because they did not see the economy growing at a high rate, despite the Government saying things were looking good.
Investors would review the past history, where "although these things are said ... in truth and in fact, if you look at it, [the Government] has not really met those numbers."
Is it now the right time to buy stocks?
Barita's Patrick Crowl expressed the view that he thought the bear market had ended last year in December, but the decline continued.
He adds: "I am not certain if it's over yet because I still see a few stocks on the market that I think were overpriced even before '04, and they may continue to correct themselves and bring the market even further down. The problem is ... that we group all the players in that sector and treat them the same way, when a few players in the sector deserve the price they were traded at but they got dragged down by the overpriced stock."
BUYING OPPORTUNITIES
First Global's Nielson Rose argued that there were selective buying opportunities, but "as to whether the market is ready to jump, I am still not yet convinced that it is quite ready. While there remains a lot of buying opportunities now, I am not yet convinced based on the numbers that I see, the volumes that trade, even when we see prices moving up, the volumes will carry them up which does not suggest that the prices will be sustainable.
"One of the drivers of our market has always been the financial sector ... Most of the financial institutions are struggling a bit with the adjustment in the [interest] rate and so those companies have to make that adjustment to where they can operate at profitable levels," said Rose.
He argued they need to return to their previous level of profita-bility "because our markets tend to like super profits from these companies."
A LEVELLING OFF
Wade Mars of Mayberry argues that the bear market has not ended "For the next three to six months we will just see a levelling off. It won't be declining as aggressively as it has been in the last six months but I don't really see it has turned just yet," he said.
DB&G's Vernon James also does not see the market falling much further, but believes "we are probably here for a while" as "people want to see [improved] earnings," which in his view we may not see before the third quarter.
John Jackson argues that the market we are in "is one of selected buying as opposed to across-the-board buying."
He argued that the market was oversold, as people became overly pessimistic, at least as far as NCB was concerned, when it went down to slightly over $14. In his view, however, we still have negative pressures, such as the effect of regulatory restrictions on Trinidadian institutions which has led them to sell off their Jamaican shares.
The critical factor in a stock market recovery will be a turnaround in business confidence, as, if this is not strong " the guys who have money are not going to spend the money."
According to Williams, some institutions have begun to get a little bit more aggressive in the market in terms of purchases. She argues, however that, "the market hasn't quite bottomed out yet. I don't think it is ready to start going up back until I see some consistent flat or sideways movement in the market before I say it is going to start trading back up, and I haven't seen that movement in the market as yet."
BETTER EARNINGS
For her, the most important factor for the market to recover is better earnings. While she has made her earnings forecasts for the year, until earnings actually meet her projections in "black and white" she will remain cautious. "We are setting the price that we are willing to buy stocks at" and " until it gets to that level, I don't mind holding cash."
For his part, Watts opined that the bear market had not ended. A similar view is shared by Bedassie who said "we are somewhere getting around to a bottom but I can't say it is next month or the next three months."
Note: The first of this two-part article was carried in The Financial Gleaner on Friday.
