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JSE main market expected to struggle in 2023

The main market of the Jamaica Stock Exchange will struggle in 2023 even after three straight lacklustre years, but less so for other indices, market investors say.

Long-term investors may see the dip in the main market as a buying opportunity for future gains, but institutional investors caution that interest rate hikes will lengthen that time horizon.

“With continued elevated interest rates and the cloud of uncertainty still looming, stock prices in general are less likely to bounce back and outperform as in prior years,” said investment banker Herbert Hall, founder and chief investment banking consultant at Ambassador Capital Partners Limited.

“We have, however, seen signs of global and local inflationary pressures easing, with the central bank of Jamaica halting rate increases at its last Monetary Policy Committee meeting. This is welcomed, but there is a general consensus that rates will remain elevated in 2023,” he said.

The Jamaica Stock Exchange operates various indices, the three primary ones being the JSE Main Market, the JSE Junior Market and the JSE US Denominated Index. Together, the three form the JSE Combined Index.

On Friday, at the end of the year, the combined index closed 368,592 points, down 8.1 per cent from 401,130 points a year earlier.

Specifically, the main market, which features the most heavily capitalised stocks, performed at its third-worst in a decade, having fallen by 10 per cent. Its worst showing was in 2020, a crisis year in which the market declined by 22.4 per cent, after falling victim to the pandemic and tumbling into bear territory.

The junior market, which features small and medium-sized companies, spiked 16 per cent, for a second year of robust growth since the pandemic year, when it declined by 21 per cent.

Also, the USD market rose by 19.6 per cent and 4.9 per cent in 2022 and 2021, respectively, after the fall of 2020.

“The main market should continue to be weighed down by large-cap stocks being sold off by institutional investors in favour of fixed income [investments]. The main market stocks have been less responsive to earnings growth than the junior market,” said Strategic Planning & Analysis Manager at Proven Wealth Limited, Julian Morrison.

“We expect the junior market index to continue to outperform the main market index in 2023. A major theme in the junior market is the post-COVID-19 boom in the services sector fuelling profit expansion, as well as several companies expanding market share and taking on growth projects. The junior firms that show earnings growth, execute growth projects, and have a strong retail fanbase should continue to outperform their peers on the index,” Morrison said.

Over a decade, the main market made annual advances six times out of 10. The advances in duration and frequency have exceeded the declines, even when factoring the big fallout in 2020. This has resulted in some investors seeing 2023 as offering a decent probability of an index rise. But the big challenge of high interest rates weigh on investors’ minds.

Morrison thinks further central bank tightening will occur in 2023 – meaning the Bank of Jamaica, BOJ, is expected to continue increasing the policy interest rate.

“Due to the stickiness of inflation, particularly core inflation, we expect market interest rates to rise further, but at a more moderate pace in 2023 than in 2022. On that basis, we expect a continued shift away from local equities towards fixed income by institutional investors. This keeps the main market’s sell side strong, which limits the upside for the large cap main market stocks. There should be a few outliers despite this,” said Morrison.

The central bank has added 650 basis points to its policy rate since October 2021, moving it from 0.5 per cent to 7.0 per cent. Rate hikes make borrowing more costly, but as for investors, they get higher returns on fixed-income investments.

Within the current environment, large investors view fixed-income securities as offering more attractive yields, while maintaining their principal investments.

The expected fall in some stock prices in 2023 has brought renewed calls for the JSE to proceed with the implementation of short-selling and the digital assets platform – initiatives that were expected to be rolled out by the end of 2022.

For years, the exchange has spoken of short-selling, which allows investors to profit from falling stock prices, and the trading of digital tokens, which are listed assets built on a blockchain platform similar to cryptocurrencies, but continues to miss their implementation deadline.

“I personally believe the JSE is not yet ready for these steps,” said Morrison.

JSE Main Market performance over a decade:

2022 down 10%

2021 up 0.1%

2020 down 22.4%

2019 up 34%

2018 up 31.7%

2017 up 49.9%

2016 up 27.6%

2015 up 97.4%

2014 down 5.3%

2013 down 12.5%

JSE Junior Market performance over a decade:

2022 up 16%

2021 up 29.7%

2020 down 21.1%

2019 up 3.1%

2018 up 18.8%

2017 up 5.34%

2016 up 44.8%

2015 up 160.3%

2014 down 9.2%

2013 up 16.9%

JSE USD Market performance over a decade:

2022 up 19.6%

2021 up 4.9%

2020 down 16.7%

2019 up 41.74%

2018 down 3.95%

2017 up 1.02%

2016 up 2.1%

2015 up 18.9%

2014 up 4.8%

2013 up 36.9%

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