EQUITY MARKET RIDING the DOLDRUMS

Market analysts and investment company, Caribbean Money Market Brokers (CMMB), noted that over the past few months, local equity investors would have seen stock prices fall steadily, resulting in most portfolios experiencing a considerable decline in value.

It reminded investors that despite large setbacks - 1987-88, 1992-93 and 1998-99, local stocks have delivered the greatest long-term return of any financial instrument.

This, it said, was raising concerns over the future performance of their investments. In a newsletter, CMMB, told investors that while it could not exactly pinpoint the cause or causes of this ‘bear market’ or predict when it will end, it pointed to some of the factors that are impacting negatively on local and regional stock prices.

Investors were told the company remained confident "that in the not-too-distant future, local stocks would rally."

Stock broker and managing director at West Indies Stockbrokers (WISE), Peter Clarke, urged investors to be patient, saying that they were "spoilt" by high returns between 2002-2005.

On the market performance so far, Clarke said it appeared that it has settled at a level where share prices are reasonable relative to earnings. He added going forward was going to be positive, investors were facing more modest returns that previously seen in the past three and a half years.

Clarke said he felt stocks were still the best long- term investment.

For new players in the equity markets, CMMB said the ups and downs of stock prices is standard fare as they move for varying reasons, some company-driven while others are from a host of external factors.

"Nevertheless, the long-term trend has been upward with some bumps along the way."

In an analysis of the stock market to 30/09/05, CMMB noted that the stock market opened the year on a promising note, continuing from where it left off in 2004, with the Composite Index progressively climbing for another new all time high in its 24-year history; peaking at 1232.19 on May 17, 2005.

However, by the end of September, the Index read 1082.86 having started the year on 1074.64 representing a decline of 12 percent from its May peak and a meagre year-to-date return 0.76 percent, CMMB said.

"These statistics, however, must be viewed in the context of the Stock Market’s long-run performance in which the Composite Index has given investors an average annual compounded rate of return of 11.97 percent over the last 22 years; including solid gains of 25 percent, 36 percent and 54 percent respectively, registered over the period 2002 to 2004," said the note which was sent to investors.

"The bull market experienced over the last three years was largely fuelled by strong investor sentiment and the positive trends in the country’s macro-economic fundamentals driven by high oil and gas prices," it continued.

CMMB analyst said though that as the second half of the year approached, "several signs began to appear which suggested that a reversal in some of these trends was imminent. These included:

• An increase in the domestic inflation rate and the resulting prospect of higher interest rates. "As you are no doubt aware, higher interest rates normally attract investors back to fixed income instruments," it explained.

• Some investors deciding to cash in some of their profits, as seen in the Jamaican Stock Market as well.

• The lack of demand in the market engendered by the non-participation of institutional buyers, particularly large pension plans and insurance companies, as they came under the scrutiny of the Central Bank.

"The main issue to be resolved is the apparent breach of asset allocation limits, enshrined in law, which was caused by the huge increase in stock prices over the past three years. The result was that these institutional investors and their normally large appetite for stocks remained on the sidelines," CMMB reasoned.

• Listed-company performances showed overall with lower profit growth for a number of reasons such as claims from damage from the recent spate of hurricanes, write-downs on loans made to countries that suffered from these hurricanes, lost existing and prospective contracts, expansion plans and the resulting increase in debt and increasing competitiveness in some of their markets.

• The introduction of automated trading on the TT Stock Exchange in June of this year has altered the way quotations are arrived at. Prices are now quoted on the basis of the last actual trade in any given stock. With bargains being struck on a "real time" basis electronically, "prices have tended to be much more volatile as traders took time to get accustomed to the new system. However, this volatility heightened the ‘skittishness’ of investors which translated into further selling pressure, exacerbating the situation during what, statistically, has proven to be the slowest quarter (June-September) in the year."

A number of companies, CMMB said it invested in announced that they were raising additional funds on the capital markets by issuing more shares via rights offerings. It pointed to one company, in particular, that kept investors in the dark about the price and timing of its Rights Issue, "creating uncertainty in the markets and downward pressure on its stock price. Although the prospects for these companies remain bright, the uncertainty created hasn’t helped their cause."

Analysts also said that while crime may be difficult to measure, it was having an adverse impact on investment decisions as well as investor sentiment.

CMMB said while it had little soothsaying ability when it comes to economic projections, "we continue to believe that holding a broadly diversified portfolio of stocks is the best long-term investment strategy."

In an attempt to assuage investor fears, CMMB said stocks are chosen on the basis of its fundamental analysis into the financial health of the company.

"We look at ratios such as prices to earnings, price to sales, price to book value and price to cash flow. This company-specific analysis is done in combination with a capital market examination into the factors that affect security prices generally and industry-specific factors that influence company performance.

CMMB said while it does not practice the "buy and hold" strategy of days gone by, "we do however hold firm to the belief that the creation of value is not an instantaneous affair but will develop over time through proper management and a good dose of patience."