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Buying US$ Bonds: Double Check, Double Check & Double Check
We have been getting this question a lot lately, so we decided to do a blurb on it!
Are bonds a good buy right now? Followed on by, doesn’t it make sense to buy them, as they can fit in to the other side of my portfolio, like the “income” side, so I should just buy some right…
A few things to note, that a financial advisor may or may not mention that you must consider when you are looking at US$ bonds if they are email blasted to you or you are called on them:
- Current interest rate environment in Jamaica and globally, is increasing, BoJ recently increased rates twice, by 1% and by .5%, presently at 2%. What is the financial advisor’s outlook on interest rates over the next 12 months to 36 months and the potential impact on your principal or bond investment if you made it, given the increasing trend in the interest rate chart?
- Are the US$ bonds being issued, euro clearable or private? That is, will they be tradeable on global markets, e.g., Bloomberg pricing or only potentially the broker that you have bought it through could potentially offer an exit or liquidity prior to maturity? In other words, can you sell your bond before maturity. In a lot of cases, you are told “yes” you can sell, but there may be fine print that states, “you must hold to maturity and/or there is no guarantee the issuer or broker will buy this instrument back or provide liquidity before maturity.”
- The minimum size scenario: this always creates a lot of confusion, and investors only really get aware of it or understand when “S*&%” hits the fan. The recent Digicel bond scenario is probably the most recent case but there are many others that may just not hit the headlines. A lot of US$ bonds, that are suggested to invest in, have minimums of US$ 50k/ US$ 100k and so forth in their prospectus, offering memo, REGs, etc. Therefore, if your advisor suggests you pick up a US$ 10k block, which in most cases you can do as the trading manager/ trader may break it up internally, you need to “double-check” because if you want to sell, can you really get your money back in T + 3 (3 trading days) or not. So, always ask, not just on the call but also over email with your financial advisor, exactly what is the registered minimum in the offering memorandum/ prospectus of the instrument that has been offered to you.
So, whether you get a private issuance, via a private placement registered deal via a broker or a euro clearable bond check on all these things before you dive in. They are just as important in your decision as the Price, the Credit Rating, the Coupon & the Yield!
BoJ & the Pesky Rate Increase Decision
Well, as they say, any change, it creates controversy, and with any sudden/ fast change it can create uproar… The recent changes in interest rate direction by the Central Bank from neutral, as we really were not downward anymore: we were really at a historical low for quite some time, has drawn criticism. BoJ increased rates by 1% and then most recently by .5%. All in all, the benchmark rate now resides at 2%. The reasoning has been inflation is higher than expected and the interest rate increase is to stave this off. The criticism mainly has been centred around that, we are still facing a pandemic, many people and businesses are still marginalized, there is still weak credit in the market and higher rates will hurt this, and very interesting comments around, higher interest rates don’t change or lower, gas prices, food prices, etc. The latter really drove a laugh, not in a funny way, but the blunt truth of it, as we do not get much of that with such serious matters. The answers were so true though… as we still trade on what some perceive as an old “inflation” basket.
For the juicier stuff, will this impact the stock market, the JSE. Not immediately, but it will, especially with the aggressive tone of these increases, so much and so fast. Recall, this is 1.5% on a base case of .5% and over a quick period. This is the message and the takeaway, and the emotion that most parties on air or publicly are essentializing. A pension, institution, or large HNW can now get on JMD$, 2% again minus any taxes, if they stay in JMD$ with some of their portfolio. Of course, the former, pensions & institutions are mandated to have a majority in JMD$. Most stocks are not giving a dividend yield of 2%. A lot of blue chips are right around that level, 1.5% – 2.3%. So, the benchmark rate at 2% is an interesting psychological investor level…
The key takeaway here from the investor perspective is the “tone” and “speed” of the rate increases will make institutional and big money investors a bit more cautious given their interest rate projections and risk return thoughts.
Market Moves:
- Always remember as an investor that with earnings reports come dividend declarations and potential receipts! Keep this in your mind when investing and in your evaluation tools or metrics. Don’t forget it. Several companies have declared dividends this past week on the Jamaica Stock Exchange (“JSE”), with some of them being keenly watched companies:
(1) Fontana Limited (JSE: Fontana), that just had another stellar quarter of earnings numbers, declared a J$ 10 cent per share dividend. It will be paid on December 14, 2021, to ordinary shareholders. Of course, not the objective of Fontana, but talk about “smart” getting shareholders some cash back on their investment before Christmas and we are pretty sure some or most of these shareholders are also customers of Fontana… well some dividend receipt holders will probably buy more shares in Fontana and/or shop with it at Fontana… either way, Fontana winning here whenever it declares dividends…
(2) First Rock Capital Holdings Limited, while the market price in respective currencies in First Rock may be down since the IPO, they continue to pay/ give back dividends to shareholders. This week they have declared another dividend. The interim dividend payment is US$ .0007/ share, and it will be payable on December 17, 2021.
(3) Lasco Financial Services Limited (JSE: LASF) which had stronger YTD financial results than its most recent quarter and has clearly been tightening its credit strategy based on having a lower micro-finance loan book and significantly higher cash & short-term deposits on their balance sheet, has declared a dividend as well of J$ 4 cents/ share. Payment will be on December 20, 2021.
(4) The corrugated box manufacturer leader, AMG Packaging & Paper Company Limited (JSE: AMG), on the other hand did not declare a dividend as expected and the Board of Directors deferred the decision to January 2022. We now await to see what happens here for the new year. In this case, AMG has never been known historically for a dividend or dividend yield play, as typically they have retained their earnings and re-invested in plant, property & equipment.
(5) Eppley Limited (JSE: EPPLEY) that is known for dividends, declared another one, and a good one! The company is designed and is known for this, and it continues. Eppley declared a dividend of J$ 3.72 cents per share and it will be paid on December 17, 2021.
- FESCO Limited (JSE: FESCO), recently opened the Beechwood Avenue location and this, just after opening the Mandela Highway location. Smooth going by FESCO. We recently, used the Mandela Highway location and it was an excellent experience. Every pump seemed like it had an attendee and the whole operation was full of customers/ cars. The wait was not too long. An appreciated point was that, in using a card, the attendee had to get a machine, and it seemed there were separate personnel who would swoop around with the machines (interesting model but comes across like you are in a pharmacy or a shopping mall versus a gas service station LOL… makes you feel nice)… during the “wait”, what was good, was the attendee, over the course of a few minutes said a couple of times, “sir, apologies and the machine and the gentleman are on his way, he will soon be here.” This was well received, and although this FESCO station is “new” it gives a good vibe, and we encourage FESCO to keep this level of service up, and level of gas station personnel present…
Bottom line here as well, is clearly FESCO Directors are seeing this too, as insiders continue to be “vested” and “invested” and are buying up more stock with the recent announcement of a Director purchasing 900,000 shares on November 15, 2021!
- In a recent issue, we spoke about Jamaican Teas (JSE: JAMT) becoming a quiet super manufacturing powerhouse in the economic landscape in Jamaica. This was based on their financial segment release that showed a profit segment breakdown of some J$ 285 million for their manufacturing line, huge result. Well in further support of this, and their future, JAMT comes out with a market shattering announcement… When you read it, please re-read it, and do not underestimate the significance of this. JAMT has brought on board as CEO of their manufacturing division, Mrs. Dianna Blake-Bennett, effective November 15, 2021. In this role/ capacity, Mrs. Blake-Bennett will have responsibility for all aspects of the Company’s manufacturing business. So, what’s so cool about this and/or important about this regarding JAMT, the manufacturing sector but also the Capital Markets? Well, lets take each one… For JAMT, to re-iterate, Dianna Blake-Bennett was a CEO at another publicly traded company in similar or same sector that was doing very well – so this is a powerhouse move; something you see in U.S. Markets, BIG WIN for JAMT… For the Capital Markets, to see a CEO move from SALF to JAMT, just gives a vibe like/ feeling like a move between JPMorgan and Goldman Sachs, it just feels competitive/ rivalry and that the Capital Markets are revving… All in all, a win here for JAMT…
- Tropical Battery Company Limited (JSE: Tropical) has headlined a release regarding a senior management change but hidden in the details is an even more exciting announcement. Clearly, Tropical Battery has a new Subsidiary! The subsidiary from the Company’s release to the Jamaica Stock Exchange is named “Tropical Mobility”. It has a nice ring or buzz to it! Tropical Mobility is described as a new electric mobility solutions provider by Tropical Battery Company Limited to serve the needs of the emerging electric mobility ecosystem in Jamaica and across the Caribbean. Tropical has also made the swift move with the release to also appoint the subsidiary’s CEO, effective October 4, 2021, Mr. Oliver Hill.
Like global markets, the race is on in the electric vehicle (“EV”) space in Jamaica for first to market and/or who will dominate the market. Tropical has clearly made a pre-emptive move here in the market and potentially on the competition with this announcement. While we are not clear on all the potential products yet, that Tropical Mobility will offer, Tropical Battery has hinted at this bigger picture move in their MD&A, annual reports, AGMs, PR articles, etc. for some time. With all of that said, Tropical Battery is now in the EV space, hey our very own local Tesla, Rivian…
- Even though Jamaica Public Service Company Limited (JPSCo) ordinary shares are not listed on the JSE, their preference shares are, and therefore they publish their unaudited quarterly numbers and audited annual numbers per the regulations periodically. It makes for interesting reading not just financially, but to also see how well JPSCo is doing. If they list their common shares, we don’t think it is a matter of a question anymore, there will be demand… Based on the most recent results, JPSCo profits continue to grow and annual revenue is fast approaching US$ 1 billion, a nice number.
JPSCo financials are reported in USD$: for the 9 months ended September 30, 2021, the company reported net profit of US$ 26.5 million versus US$ 24.4 million for 2020, +8.6%. For the 3rd quarter, the company reported net profit of US$ 9.25 million for 2021 versus US$ 6.98 million for 3rd quarter 2020, a jump of +33% year over year. Operating revenue clocked in at US$ 698 million for YTD – year to date, 2021, and if there is a bumper 4th quarter or perhaps in 2022, one way or another, it seems JPSCo, annual operating revenue will eclipse the US$ 1 billion mark.
JPSCo is doing well, and they are in the Money, clearly from the results.
There is no reason besides the current Pandemic, why not stronger consideration should be given to list the common shares of JPSCo to continue to grow the capital markets & the JSE market capitalization for Jamaica and our shareholders.
See you next week!
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ITSMONEYMARK 