Monday, December 25, 2006

Looking to 2007

At the start of each year the cartoonists usually draw an old man handing over to a young baby, depicting the change from one year to the next. Now whether that baby grows up to be a fragile old man or one who is in good health depends a lot on how we handle our economic and social affairs. For a very long time the Jamaican economy has consistently grown into an ageing person suffering from hypertension and diabetes by the end of the year, as we have refused to do the necessary exercise and eat the right foods that will make us full of vim and vigour.

So what is in store for 2007, based on where we are today and what are we capable of achieving? The majority concedes that the economy is showing improving signs and expect that increased growth will take place in 2007, and this will have a positive effect on the fiscal accounts. Agriculture and tourism seems positioned to do well in 2007, and I am particularly excited about agriculture as I believe that this holds the key to an economic turnaround, as I have been positing for a while.

Risks to economic growth
As we go into 2007 though we have to be aware of the risks to economic growth. We have been in this position before where we thought that the economy was poised for growth and this was turned around because of the selfish action of our politicians, who always believe that the party is more important than the country. I trust, however, that our politicians will have learned from the past and have matured enough to realize that if the country does well then everyone will also, including the same party supporters.

The main risks to Jamaica’s economic growth are (1) placing political objectives ahead of the economy; (2) increasing crime levels; and (3) ignoring the need for productivity increases, particularly in the public sector. If we do not address these issues then we will at best continue to see the aneamic growth rates that we salivate at. While we are happy to be growing at 2% to 3%, our competitors are growing at upwards of 5%. So there is a lot more that needs to be done. Assuming, however, that our politicians can control their urge for calorie intake and ensure that Jamaica is fed a healthy diet of good economic and political policies, then 2007 does look good for us.

So going into 2007 the main risks will be our political intentions, especially as we head into an election, and the effectiveness of the police force in addressing our crime landscape. The recent events in Montego Bay show what many of us have been saying for a long time, the first action needs to be that the police force purges themselves of all the criminal minded police. Only then can they be truly effective in solving our crime situation. And corrupt police and politicians should be held to a higher standard than the average citizen.

For 2007, I expect that the growth in the economy will be led by agriculture and tourism. If one looks around, there is not much else that offers us the competitive advantage that we have in those areas. What we must do from a developmental perspective is ensure that we maximize the benefits of these sectors, and therefore I would approach it in the following manner:
Firstly I would seek to substitute many of our imported products with local production. There is no doubt that one of the main problems with the Jamaican economy is that our import content is too high. We can therefore make significant strides if we (i) organize agriculture to replace much of the imported foods used in hotels and consumed locally; and (ii) replace imported clothing with locally produced clothing lines; and
Next I would encourage investments into agro processing enterprises. This would allow us to add greater value to our agricultural production thus enabling us to earn more for each unit of production. If we are able to do this then we would add more high value jobs rather than the low skilled low paying jobs we have been focusing on.

Of course for these policies to really pay off we need to (i) focus on improving our primary road network; (ii) emphasize training opportunities; and (iii) continue the downward trend of interest rates. If we can achieve this then the economy will be on sound footing. The only wild card in my mind remains the schizophrenic tendencies of our politicians as they approach elections.

Individual investor
So what does this mean for the individual investor? This is the question that people tend to ask me a lot. Well at the end of the day it all comes down to the confidence one has that our politicians will take the right decisions for the economy. Assuming that they do then I see a lot of opportunities opening up.

First I would expect that the stock market will continue to improve. My logic is based on the fact that stock prices are based on company performance. If company profits improve then stock prices will increase. Company profits in 2006 were mostly down because of the adjustment to do with reducing interest rates, as many companies were invested in government paper and as rates came down then they had to reorganize their income sources. This included some downsizing but also many companies invested in new activities. The price earnings (PE) ratios are also lower than the average ratios before the market started to decline, which I would expect to go back up. There are certain stocks that will do better of course, and to select these then persons should see their stock brokers (make sure you have a good one).

As an example, if agriculture and tourism are expected to be the main growth sectors then I would look at companies positioned to take advantage of this. Additionally, there is a lot of construction taking place, and with an improved economy the housing market usually does better, which means that companies related to the construction sector will benefit most. This type of analysis should not only serve the individual investor but also should be the approach companies take in determining what they invest in.

Based on the report that consumer loans at commercial banks have increased by 33% ($13 billion) over the prior year, these banks should see an improvement in their bottom line, as they take advantage of higher interest spreads. In my opinion though this market is not sustainable if general income levels do not improve, and so for them to continue to grow profits they have to make a switch to funding small businesses. This in turn will drive economic activity also. Whoever positions themselves to best take advantage of this will see the greatest profits, and consequently the greatest stock price increase.

I also believe that there are creative investment opportunities out there that can provide acceptable risk with higher returns. Real estate will provide opportunities also but I think one should be selective in the type of real estate one invests in. The international market also provides opportunities for good returns and diversification, especially with the increased access to market opportunities provided through the internet and some local institutions. The present position of the US, European and Asian economies also provide opportunities for playing one against the other.

So while I expect that the economy will improve, a lot rides on political will. Even with that concern, however, I believe that there are specific opportunities open to investors who consult with their investment advisors and plan for 2007.


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