Jamaica bond king talks new products for JSE

Wall Street veteran suggests new products for financial sector

Keith Collister

Sunday, September 16, 2012

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At the Jamaica Stock Exchange (JSE) Thursday morning seminar, Wall Street veteran Gregory Fisher, a man who has traded more Jamaican Eurobonds than anyone else at Bear Stearns and subsequently at Oppenheimer, was tasked with speaking about "Creating New Products in the Financial Sector".

Fisher, who was presenting just before the announcement by the Federal Reserve of the widely expected QE3, meaning a third round of quantitative easing, started by noting that "Johnny six pack", his name for the average American consumer, still remains on "life support" as a result of the continued weak economic conditions in the per cent, particularly the high level of unemployment. Fear has now replaced greed in the US, and as a consequence, both the savings rate overall, and the amount held in cash, has more than doubled as a percentage of average income.

Fisher believes the era of what he calls the QE "sugar rush" is quickly coming to an end, as although it mitigated the economic downside, its main affect now to push up financial asset markets. The US stock market is now dominated by "fast money" players dependent on continued Central Bank easing, and is currently "overbought", in that although not necessarily over- valued from a long-term perspective, a major downward adjustment is likely in the near term as the fundamentals are deteriorating. It is a bad sign, he says, that revenues of some major US companies are now starting to fall just as the Central Bank "bazookas" are finally out of ammo.

Despite this, he believes US dollars are "the best house in a bad neighbourhood", as it is likely that the Euro will eventually collapse, perhaps in the next six to 12 months, with several countries going back to their own currencies. In his view (shared by many of the major institutional investors he covers) devaluation is the best way out for those individual countries, such as Greece, that are trapped by the "contagion" of a never-ending recession. Fisher also notes that Wall Street now regards gold as an asset class in its own right rather than a mere "hedge".

Fisher shared that over the past four weeks the global economy has continued to deteriorate with Europe a disaster, China and the rest of Asia slowing (he had just visited), and a weakening in global manufacturing. He also believes the so called "fiscal cliff" in the US, meaning automatic tax rises and expenditure cuts of nearly four per cent of GDP in 2013 unless Congress acts, is a "big deal" even if the issue is kicked down the road as the market currently expects.

Fresh from visits with his US "tier one" institutional clients, meaning the likes of PIMCO and Fidelity, and the Asian institutional investor base, Fisher observes that capital is now being deployed globally based on the old fashioned principles of preservation of capital, liquidity, income (getting paid while you wait), stability and diversification. US institutional investors are looking to "lock in" yield, as well as continue to diversify out of the developed world into the former emerging market countries that have either gone through or know how to get through a crisis. Rather than "flipping" the bonds they buy to local players, as has occurred with countries such as Jamaica in the past, international investors are now looking to hold their emerging market sovereign bonds as the yields are better than they can get elsewhere. International investors are also very keen on the bonds of well managed large international corporates, as they believe the corporate will often run their business better than the government can run the country. He noted that Digicel had recently raised US$1.5 billion from mainly US institutional "high yield" investors and that Asian investors are also now looking at investing in Latin American bonds (including recent regional issues such as Digicel and Aruba) through a process of elimination, meaning that Europe and the Middle East no longer look attractive, and they want to diversify away from their focus on "hard" commodities (metals and oil) and related commodity companies.

In the current environment of economic uncertainty, some of the financial products that Fisher believed deserved a second look by Jamaican investors included convertible bonds (a debt equity hybrid providing both a "cash" coupon payment and capital appreciation), municipal bonds (the default potential of US municipalities was exaggerated making yields attractive relative to government treasuries), Global Depositary Notes or GDN's (a debt instrument created by a local depositary bank to evidence ownership in local currency debt) - he recommended the Dominican Republic and Panama, real estate investment trusts (REITS) and alternative investments such as commodities.

Fisher noted that in the past, overseas investors bought Jamaican bonds on the basis they could always be sold to locals, the famous "Jamaica bid", but that Jamaican investors were increasingly looking to diversify outside of Jamaica. Over the past six months, the size of the average trades in Jamaican paper had shrunk dramatically, from between say US $10 to 15 million dollars, to between US $200,000 to $800,000, with international investors mainly selling to Jamaican buyers. In short, the Jamaica bid was not as strong as it used to be. Going forward, Fisher believes the current 90 to 95 per cent local ownership of Jamaican Eurobonds is likely to shrink as local investors continue to seek international diversification.




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