Sterling Asset management outlines lower-risk alternatives to stock exhange
Sterling Asset Management, through its vice-president for fixed and foreign exchange Eugene Stanley, strongly believes that local investors are taking more risks to try and get higher returns — especially after the world-leading performance of the Jamaica Stock Exchange.
Speaking at a recent investor's forum put on by the company, Stanley highlighted that yields on Government of Jamaica USD international bonds have fallen by more than 20 per cent in the last five years. He further offered that local investors are eager to take part in the rally and the plethora of new investment instruments. He then warned that there is danger in that some investors may not be aware of the risks involved.
“Back in 2014, GOJ USD bonds were yielding between 3.756 per cent and 8.62 per cent,” he explained.
“Fast-forward to 2019, GOJ USD bonds of the same likes are yielding between 2.763 per cent and 6.31 per cent. As such, investors are being forced to look elsewhere for returns.
“There has been an increase in corporate debt issuance locally, and we have seen a rise in bond and preference share issues from local companies looking to raise funding.”
Stanley maintains that investors can get higher yields on safer and more liquid instruments overseas.
“Based on the recent local corporate bond and preference share issues, we at Sterling have found out that investors are not always sufficiently compensated for the risks involved in the projects or credits,” he revealed.
“In the search for higher yields, some local investors have flocked to the stock market due to its recent performance. In 2018, the nation's main index rose 29 per cent in US-dollar terms — the most among 94 national benchmarks tracked by international market analyst, Bloomberg,” Stanley observed.
Stanley's analysis also presented 10- and 20-year returns on the Jamaica Stock Market of 17.55 per cent and 16.43 per cent, respectively, in Jamaican-dollar terms).
“This revealed that while the Jamaican stock market has a good long-term track record, returns are still notably below recent levels.
In an interview with Bloomberg Markets, Marian Ross, assistant vice-president at Sterling for trading and investment, attributed the outperformance of the Jamaica Stock Exchange to high levels of Jamaican dollar liquidity.
“The fact that the Government has not been issuing debt means that liquidity is free to flow to the stock market,” Ross said.
Ross pointed out that historically, Jamaican government bonds previously attracted very high interest rates, and that this had disincentivised stock market investing. In addition, Ross posited that Bloomberg had pointed out that the share of Jamaicans with brokerage accounts has gone from less than five per cent to more than 10 per cent in the past decade.
Stanley then added that from a policy perspective, easy monetary policy on the part of the central bank bodes well for stocks or for owners of private companies who would use debt to expand and grow.
“This makes it easier for businesses to borrow, and this should result in increased economic activity,” Stanley stated. The more relaxed credit environment, he said, has also had the effect of lowering interest rates on bonds issued by local companies, the central bank or the Government. This is not so great for the investor looking to put his/her savings to work, however. As investors demand higher returns, they need to carefully assess the risk of the underlying investments.”
In closing, Stanley said that because of this objective of investors to earn higher returns, Sterling has been helping investors find more attractive investment options overseas, with higher yields and lower risks.