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Welcome to Jamaica, Home of the World’s Best-Performing Stock Market
The Jamaican stock exchange is so obscure, even emerging-markets funds don’t go there. And it’s booming.
At the world’s best-performing stock market, things operate a bit differently than they do on Wall Street. No one complains about short sellers swooping in to drive down share prices or high-frequency traders eking out an unfair edge, because neither exist here. And forget about premarket or after-hours sessions that stretch the trading day around the clock. At the Jamaica Stock Exchange on the waterfront of Kingston Harbour, investors have just three and a half hours a day to buy and sell.
So this market isn’t ready to plug into the hyperactive trading desks of New York and London. Not yet. There are zero Jamaican stocks in U.S. exchange-traded funds, even those tracking “frontier” countries such as Kazakhstan, Sri Lanka, and Vietnam, the most emerging of the emerging markets.
Still, Jamaica’s stock returns are the sort that tend to be a beacon for adventurous global investors—a flash of bright green digits on computer screens that have lately been lit up in red. In 2018 the nation’s main index rose 29 percent in U.S. dollar terms, the most among 94 national benchmarks tracked by Bloomberg. Its outperformance over the past five years is even more striking. Jamaican stocks have surged almost 300 percent, more than quadrupling the next-best-performing national benchmark and septupling the S&P 500’s advance.
What explains these gains? A Caribbean economic miracle the world has overlooked? Not exactly: Real growth in Jamaica has averaged less than 1 percent the past four years, and it’s expected to come in at 1.7 percent for 2018. The bull market is partly a matter of math. It doesn’t take much investment to make a tiny market boom, and the total value of the 37 stocks in the main Jamaica index is less than $11 billion, smaller than the valuation of Chipotle Mexican Grill Inc. But it’s also a story about Kingston’s nascent attempts to reinvent itself as a financial hub, even as it works to reduce the heavy debt load that brought the country to the brink of crisis a decade ago. “Clearly, capital goes where it’s comfortable,” says Paul Simpson, a 36-year-old banker and investor in Kingston. “To see capital coming here means people must be comfortable.”
The Jamaica Stock Exchange began operations in 1969.
Jamaica’s financial industry is mostly headquartered in the neighborhood of New Kingston, which is nothing like the caricatures that dominate global perceptions of the island. You won’t see a lot of hard-partying tourists, or the poverty of places like Trench Town. Instead, Audi and Porsche dealerships are here, along with one of the Starbucks stores that have sprouted up on the island, selling Blue Mountain coffee brewed from beans grown on nearby hillsides. Over the past decade, Jamaica’s financial sector assets have tripled and the number of institutions has grown eightfold, according to International Monetary Fund figures. While Kingston still regularly appears on global lists of dangerous cities, the World Bank now ranks Jamaica as the sixth-best nation in terms of ease of starting a business.
“If I could hold a megaphone and tell investors now’s the time, I’d do it,” says economist Uma Ramakrishnan, the IMF’s Jamaica mission chief. Some investors have already received the message. China’s Jiuquan Iron & Steel plans to spend about $6 billion to expand output at an aluminum refinery and develop an industrial park. Foreign corporations have also bought the producers of Red Stripe beer and J. Wray & Nephew rum in recent years. And the share of Jamaicans with brokerage accounts has gone from less than 5 percent to more than 10 percent in the past decade.
But for investors within earshot of Ramakrishnan’s megaphone, there are still enormous limitations to consider, starting with the equity market’s minuscule size. The number of shares available to the public is even smaller, because many companies are majority-owned by conglomerates, in particular foreign companies tapping into Jamaica’s capital markets. NCB Financial Group Ltd., the dominant bank, which accounts for almost a third of the stock index by market value, is more than half-owned by Jamaican-Canadian billionaire Michael Lee-Chin’s investment company. Scotia Group Jamaica Ltd., the second-biggest stock, is about three-quarters-owned by Bank of Nova Scotia. It’s common for some Jamaican stocks not to trade for days or even weeks. When the list of gainers and losers is tallied on any given day, the number of unchanged stocks often outnumbers both.
The exchange’s managing director, Marlene Street Forrest, has heard the criticisms and says things are improving. The time it takes to settle trades has been shortened to two days from three to comply with international standards. The exchange is planning to introduce market making this year, a way to ensure stocks have a ready buyer and seller. It’s also exploring adding other tools familiar to traders in bigger markets, from margin accounts allowing people to invest with borrowed money to short selling so they can bet on prices falling. But it’s approaching change gingerly. Street Forrest sees no need to extend trading hours if the demand from investors isn’t there yet. “We ensure that we are going to get it right before we move,” she says.
Street Forrest already has a lot on her plate. She’s preparing for more than 20 new listings this year, including an initial public offering for a government-owned power supplier, Wigton Windfarm Ltd., as part of a privatization effort, and several smaller companies coming to the exchange’s junior market, which includes companies even smaller and less liquid than those in the main index.
The exchange was created 50 years ago, spearheaded by Edward Seaga, a Harvard-educated Jamaican who started his career as a record producer in the 1950s and ’60s and was among the first to press ska music onto vinyl. He later got into politics and was appointed finance minister. In the ’70s, Seaga went on to lead the Jamaica Labour Party, the capitalist rival to the charismatic socialist leader Michael Manley, who was moving Kingston closer to Havana and further from Washington. Jamaican politics in that era could be mistaken for civil war, with frequent deadly confrontations between supporters of Seaga and Manley. Such political violence is largely a thing of the past. Another legacy—a buildup of debt—has been harder to shake.
Perhaps the key factor in the stock market’s rise has been the country’s approach to taming that debt, a project not without cost for many Jamaicans. For a long time, the most obvious way to earn a return from Jamaica has been to lend to it. In the wake of a national banking crisis in the ’90s and the global financial panic a decade later, the government’s debt pile swelled to 145 percent the size of the economy. Interest payments consumed more than half the government’s revenue, choking off funding for important social and infrastructure projects. Jamaican bonds paid such high yields, they crowded out other investment options, making it more difficult for companies to raise money.
Jamaica had a perfect record of paying off government debt, but the financial crisis of 2008 threatened that, as key pillars of the economy—tourist spending, foreign remittances, bauxite and alumina exports—all started to shrink. The country’s debt ratings were cut, the Jamaican dollar plunged, and the interest rates demanded by investors on short-term government bills jumped to a punishing 25 percent. To get help, the nation was forced to turn to the IMF, with which it had had a dysfunctional, on-and-off relationship for most of its five decades of independence.
IMF and World Bank financing comes with conditions, and they can be harsh. In the 1970s they included opening up the economy to international competition, which decimated the agricultural industry, as Jamaican farmers struggled to compete with corporate American producers. This time, the international financiers recommended shrinking the government workforce and reining in wages. This led to what the Center for Economic and Policy Research called “the most austere budget in the world.”
The IMF worked with Jamaica on a “unique experiment” to restructure its bond debts—but it didn’t reduce the principal owed, which could have destabilized the Jamaican banks that held the securities. Instead, starting in 2010, it did debt exchanges, reducing the average interest rate while extending the life of the loans. Making payments easier has helped to reduce the debt to about 100 percent of GDP over the past four years, which is still a burden but a more manageable one. The lower interest rates and shrinking supply of bonds have boosted confidence in the country’s financial health and led to a classic “search for yield”—with bonds offering less, investors are looking for other opportunities. Including in the stock market.
Jamaica has also had some luck. The global economy keeps humming along, and hurricanes have spared the island the worst of their wrath in recent years. The result is a whiff of optimism in Kingston that things might be turning a corner. Unemployment reached a record low of 8.4 percent in 2018. The Jamaican dollar has been relatively stable over the past two years, after decades of depreciation. Inflation has dropped from more than 9 percent to less than 4 percent in the past five years. The central bank has been touting its success with a nod to national pride, tweeting a music videowith the lyrics “low and stable inflation is to the economy what the bass line is to reggae music.”
Simpson, the Kingston investor, is responsible for last year’s best-performing stock. His Cornerstone United Holdings Jamaica Ltd. took over a controlling stake in brokerage Barita Investments from the latter’s 82-year-old founder, Rita Humphries-Lewin—the only woman whose picture hangs in the exchange boardroom’s gallery of past chairs. The changing of the guard fueled a 630 percent gain in Barita’s shares. Simpson raised 8 billion Jamaican dollars—about $61 million—in the local capital market to fund the deal and expand Barita as well as Cornerstone’s other holding, MF&G Merchant Bank.
Like millennial dealmakers the world over, Simpson thinks of business opportunities in terms of “disruption”—his vision for Cornerstone is to be a low-cost, high-tech upstart shaking up the island’s banking industry. He’s also engaging in another, subtler form of disruption: helping to halt the flow of people leaving the island in search of a better life elsewhere. He’s recruited Jamaican bankers with Ivy League and Wall Street credentials for his management team. “We feel the fundamentals are strong here,” Simpson says. “We had 18 years of stagnation. So what you see now is all that pent-up gray matter being exposed through our capital markets, because people just want to have their skill sets shown here.”
This type of talk is manna to the government and the IMF alike. Remittances from the global diaspora of Jamaicans account for almost one-fifth of the island’s GDP. “If you’re thinking of the potential of an economy like this, imagine these people coming back,” says Constant Lonkeng Ngouana, the IMF’s resident representative in Jamaica.
Gauging Jamaica’s economic potential is a common pastime for many here, but not everyone is convinced the turnaround is real. At Sterling Asset Management, trader Marian Ross’s computer is plugged into markets all over the world—and she’s finding a lot to like outside Jamaica. The firm, run by her father, largely avoided Jamaican government paper because of the risk of currency depreciation—even when it was yielding north of 20 percent. It put clients into lower-yielding U.S.-dollar fixed income instead. Ross pulls up a chart that shows how Jamaican currency worth $1 million in 1974 is now worth less than $8,000.
While Sterling has its own equity listed on the exchange—it climbed 39 percent in 2018—Ross isn’t sure how sustainable the rally will be for the index as a whole. Despite the success the government has had with its finances, she says, “I am not necessarily convinced there’s a path for real economic growth. What’s going to take this to the next level?” She doesn’t see an obvious answer.
Vision 2030, a far-reaching national project embraced by both Prime Minister Andrew Holness’s Jamaica Labour Party and the opposition People’s National Party, aims to steer the country to developed-nation status in 11 years by beefing up its services, mining, and manufacturing industries, while capitalizing on its location along the Panama Canal shipping route to expand Kingston’s role as a logistics hub. It’s ambitious, to say the least, and will need to overcome plenty of risks. Along with hurricanes, an oil-price shock or a U.S. recession are lingering threats. And with IMF programs drawing major protests in Argentina, Jordan, and other countries last year, there’s no guarantee Jamaica’s people and politicians will continue to countenance aggressive austerity. In its latest stability assessment, the IMF concedes as much. (It also notes that economic growth is still disappointing.)
Andre Haughton, an economist at the University of the West Indies in Kingston, says the government also needs to tackle the perception that there’s too much crime and corruption in Jamaica for outsiders to do business here. While the U.S. State Department ranks the country’s homicide rate of 60 per 100,000 people among the five highest in the world, Haughton points out that foreign visitors are almost never the victims. He also notes that governance reform is possible, invoking Lee Kuan Yew, the former leader of Singapore, who transformed that country into an international financial center in large part by weeding out corruption.
Lately the Jamaican news has been dominated by a scandal at the state-run refinery Petrojam, where tens of millions of dollars’ worth of oil went missing and a variety of questionable spending has come under scrutiny. How the probe is handled could send a signal that Jamaica is holding important people accountable. “It’s all good and well we have a very good stock market,” Haughton says. But “if we don’t deal with the level of corruption, then we won’t be able to solve our problems. It’s going to continue to be a country with different assets, different facets, but never a properly coordinated economic trajectory.”