January 24, 2016
In his 10th Jamaica Stock Exchange conference opening speech — now for US investment bank Jefferies — Caribbean “bond king” Gregory Fisher once again outlined the state of the international markets and global economic landscape.
Fisher — formerly of Oppenheimer, and before that Bear Stearns — was part of a team (including 10 from Japanese bank Nomura) that moved to US investment bank Jefferies late last year, joining their nearly 4,000 employees (including 850 in Europe and 300 in Asia). Jefferies has over US$11 billion in long-term capital, is number 252 in the Fortune 500, and also a member of the S&P 500.
Stressing that his new home is not accountable for his comments, he started by noting that the New Year brought the worst weekly start to the global equity markets in nearly a century, with overall market sentiment as poor he had seen it in his 34 years in the business. He cited an anomaly not seen for nearly six decades : the S&P 500 dividend yield at 2.5 per cent exceeded the yield on the 10-year US Treasury note.
The main catalyst for the market’s recent malaise was the fall in oil price of crude, with several investment banks now forecasting a formerly unbelievable (to Fisher), but now possible low of US$20 per barrel.
Headwinds the US markets face in 2016 include : the US Fed tightening and the uncertainty as to the timing of their next move; flat to weak US earnings don’t support a frothy equity market; inflation in hibernation with little chance of awakening anytime soon; the return of geopolitics (China, North Korea), “oppressive” US dollar strength, all combined with an election year where the leading candidates are “clearly out of the mainstream” creating additional uncertainty in Wall Street.
His bottom line is that 2015 volatility failed to correct the excess within the US stock market, and, until underlying fundamentals and valuations are far more reasonable, investors will seek both liquidity and safe haven trades.
In his view, in addition to a ‘reset’ or a proper market correction, before the timing is appropriate to dive back into the markets investors will also need: improving earnings (to support current levels of the leading US equity indexes); sales growth (not the recent deprivation); jobs (not just adding part-time employment); and “some” energy sector stability.
In addition, the rate of redemptions needs to fall (investors pulled nearly US$10 billion from global equity funds so far in 2016), and finally, valuations need to catch up with Wall Street’s continually falling S&P 500 forecasts.
He believes the volatility in 2015 is likely to become far more pervasive globally in 2016, with diversification becoming even more crucial. Fisher argues that even if the European Central Bank and the Bank of Japan are only half as successful as the US in their seven years of quantitative easing, European and Japanese assets may be a buy. He believes bonds in particular will remain “in vogue far longer than many of the pundits had previously predicted”.
Liquidity will be key in 2016 however, with risks including the implosion of China, the conflict between Saudi and Iran, oil, and the IMF lowering its global growth outlook.
He cited a recent research piece by his new bank, Jefferies, that “There is a growing void of liquidity”, and “Market makers have pulled back on everything”, although noting they were not “predicting disaster”.
Turning to Jamaica, Fisher argued that with Jamaican debt to GDP falling drastically over the past 12 months, and improving fiscal balances, Jamaica has finally regained its “powerhouse” status as the economic leader of the Caribbean.
Fisher noted that Jamaica is on track to have a lower debt to GDP than the United States by 2020, and achieve a rate of growth of better than two per cent in 2016, a huge jump from 2015’s estimated growth rate of 1.3 per cent.
He cited the view on Jamaica of Jefferson Finch, formerly of Normura, but Jefferies’ brilliant new sovereign debt economist: “the political consensus in support of the IMF programme and current macroeconomic policies over the medium term are very strong” and “we think Jamaica will continue to be an improving story on the policy front given the anchor of the IMF programme”.
He noted that in addition to Jamaica’s stock market posting the best returns globally last year, Jamaica bonds were also the 7th best performer within the EMBI Global Index out of 65 benchmark countries.
He observed that Jamaica is currently trading in line with most “BB” rates countries such as Costa Rica, and trading better than higher rated credits such as El Salvador and Brazil.
This reflects not only Jamaica’s improving credit status (in a later aside he predicted Jamaica is due for further upgrades to BB), but Fisher argues our “liquid” bond curve is even being currently regarded as a “safe haven” trade for many of the emerging market top Tier funds.
Finally, despite what may look like strong headwinds for emerging markets in 2016 from falling oil and commodity prices, deceleration in Chinese growth, Middle East tensions, and possible FED rate hikes, Fisher argued that Jamaica seems reasonably well placed compared with other emerging markets to manage these risk factors.