How to invest in Jamaica?

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How to invest in Jamaica?

The Country

 Jamaica for most of its history was one of the world’s major producers of sugar. Depending heavily on slave labour until its abolishment in 1833. Jamaica gained full independence from the UK in 1962. Since then, economic growth has been unevenly spread across the country and severe economic deterioration was seen in the 1980s coupled with mass emigration to the United States, UK, and Canada. The country has always punched above its weight in terms of cultural influence. Unfortunately, that has not translated to much in terms of economic impact.

Similar to most of the Caribbean, the GDP is heavily reliant on services (>80%); tourism alone contributes about 30% to Jamaica’s GDP. Unfortunately, the economy has not been managed well nor has growth been impressive. See below for equity returns and GDP growth in Jamaica over the last 3, 5, 10, and 20 years.

Figure 1: JSE annualized returns and Jamaica’s GDP growth:

Jamaica---Figure-1

 The Jamaican Stock Exchange (JSE) has had negative returns going back 10 years. It is only when you look at the market over the last 20 years that you see an attractive growth rate of 8.5% annualized. What this means is that the first 10 years of that 20-year period (1994 – 2003), the JSE returned 20.9% annualized for 10 years. Clearly, both the country and the market have fallen out of favour.

See the fact box below for some basic information on Jamaica.

Figure 2: Jamaica Fact Box

Figure-2---Jamaica

The one glaring line item is the debt-to-GDP ratio. Jamaica has horribly run over the past 10 years. The government underwent significant expenditures over the last 15 years that assumed a much higher growth rate for the country than what was actually experienced. The negative growth has increased the ratio as GDP declined and debt increased. The country runs in perpetual deficit. The problem now is debt service costs. The country has run a surplus since 2009, excluding debt service costs. The objective of the current administration is to reduce debt-to-gdp below 100% by 2020, but their conviction towards this goal is entirely unclear.

Inevitably you must ask, why are we bothering to focus on Jamaica? There are a few reasons why we think Jamaica is an interesting country and why having a modest allocation to the country would benefit a portfolio over time. Outlined below are our four main reasons for being optimistic, over the long-term about Jamaica.

  1. Jamaica has a 96% literacy rate and a population that is significantly under-employed. Costs within the country are competitive, and the country’s laws allow for significant wage flexibility. Productivity is a concern, but we feel that this is more of an outcome of the lack of efficient businesses, than an indication of something fundamentally wrong with the population. The WEF Global Competitiveness Report, which we highlighted in this article, has a good summary of Jamaica’s strengths and weaknesses
  1. Jamaica is heavily reliant on the United States. About 50% of exports are destined for the United States and about 83% of tourists come from the United States. The country publishes a good tourism report annually, which is quite useful for insight on Caribbean tourism; you can access it here.   As we all know the US is recovering quite nicely and this may provide a significant lift to Jamaica’s economy, which is really a leveraged bet on the United States.
  1. Jamaica can benefit temporarily by the decline in energy prices. Jamaica has no oil or gas and it constitutes its largest import item; mostly from Venezuela and Trinidad and Tobago. A persistent decline in energy prices is likely to boost the economy by up to 2%. Another interesting change in Jamaica is the rapid growth in tourism and investment from Latin America. As countries such as Peru, Chile, Colombia, and Brazil experience economic growth they are looking to spend more money within the Caribbean. Granted, Jamaica being English-speaking is at a disadvantage relative to places like the Dominican Republic and Cuba, but we do expect them to benefit over the coming years from the rise in Latin America.
  1. The IMF recently provided Jamaica with about $1bn in funding to help correct their financial woes. Part of this program is a requirement for a balanced budget as well as wage freezes in the public sector. The government seems to be committed to fulfilling these requirements and Jamaica has already passed IMF tests on five occasions. It may be naïve, but we are cautiously optimistic that with the IMF’s guidance, Jamaica can turn the corner on its disastrous fiscal management.

The Laws

English common law, the bastion of the global investor pervades in Jamaica. The World Bank has a great summary for each country in terms of shareholder protection and general legislative protection. Jamaica does quite well; see here.

The stock market is overlooked by a division of the stock exchange; the Regulatory and Market Oversight Division, which is guided and informed by the Regulatory and Market Oversight Committee. They are surprisingly active for a small exchange in a small country. You can see a report they publish here. Auditing standards are amongst the best in the world, and we personally have no concerns about investing in Jamaica as far as shareholder protection or legislative protection is concerned.

The Stock Market

The Jamaica Stock Exchange was founded in 1968 and commenced operations in 1968. Two weeks ago, the JSE joined the UN’s sustainable stock exchanges initiative; a positive move in our view. We highlighted this initiative in this article.

See the basic facts about the market below:

Figure 3 – JSE Factbox

Figure-3---Jamaica

There is not much to incite a large institutional investor in the factbox above. Small population, total market capitalization of a midcap name, only 36 members and very limited turnover. All of those concerns are valid. The benefit  of being an individual investor or a small frontier markets’ investor is you can invest in places that those with larger piles of cash cannot.

The stock market has not done well in the past 10 years, but we do not believe its poor performance is sustainable and there are a few good companies in Jamaica that are worth investing in. There are 11 companies in Jamaica with a market cap higher than $50mm USD, with the largest being the Scotia Group, with a market cap of $540mm. See the information below on these companies.

Figure 4: List of companies in Jamaica with a market cap greater than $50mm

The one thing we would highlight is the low valuation for these companies. If you are buying companies, not stocks, this has to be an attractive proposition. Being able to buy quality companies at an extremely low valuation.

The JSE also has a Junior Market, but it is so small, we really have not focused on it for the purposes of this piece. If you are interested in the Junior Market, we would be happy to provide you with some information.

Can Foreigners Invest?

Absolutely. It is actually quite easy, especially if you are Canadian or have a relationship with Scotia Bank.

  1. Open an account with a broker registered on the Jamaica Stock Exchange. The two that we would highlight would be Scotia (we are Canadian, of course), and JMMB.   The great thing about Jamaica is there is essentially no difference between a local investor and a foreign investor. Scotia’s form is even available online, here. You will need to provide all the relevant information that you usually have to; passport, proof of employment, source of funds etc. Virtually all banks in Jamaica comply with FATCA so keep that in mind if you are American or do business in the United States.
  1. Fund the account. You can wire money from your foreign account and you do not require a local bank account. The JSE is working on an online platform for trading, but currently you would still have to use a broker for trade execution.

It really is that simple.

Caveats

We are highlighting the investment case for Jamaica so we are of course quite upbeat. There are however, significant risks with investing in Jamaica. Chief among them is currency. The Jamaican Dollar (JMD) has depreciated, -20% in the past 5 years. While the country seems to be improving its financial situation, we are not confident in the government. If you do invest, please keep in mind the potential deleterious impact of currency depreciation.

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