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Capital markets: Is now the time to invest?

Capital markets: Is now the time to invest?

It has been a roller coaster, but there are opportunities for investors with an eye for a bargain

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The Bahamas Investor Magazine
January 21, 2010
January 21, 2010
Philip Dorsett

2007 was as excellent a year as any Bahamian investor could possibly have hoped for. Bahamian public companies from just about every sector of the economy saw surges in their share prices–from Cable Bahamas to JS Johnson & Co to Bank of The Bahamas. The country’s economic boost was evident right across the entire spectrum.

Companies such as Freeport Oil Holdings Company Ltd (FOCOL) and Commonwealth Bank actually saw annual returns of over 100 per cent. These returns were also reflected in the local equity funds, which had end-of-year returns as high as 27 per cent.

Even with the looming US subprime mortgage situation, which was just in its beginning stages then, the overall Bahamian economy still saw significant growth of about 6.5 per cent, up from 4.4 per cent in 2006.

However, as is always the case, this level of growth could not be sustained indefinitely. Many investors made the classic mistake of buying in what was actually a seller’s market–a peak period when prices were inflated. This situation was reminiscent of 1999 when, during the height of the dot com boom, many investors suffered significant losses through buying into technology companies whose prices were not supported by earnings.

The key issue to note is not that an investor should stop investing in a bull market, but rather that stock prices ought to be based on their estimated future earnings (not recent prices), and investors need to develop a much better assessment of future economic conditions before making an investment decision. Relying on the continuation of previous stock performance without looking at expected earnings was the common mistake that many investors fell victim to during the latter half of 2007.

2008: the downturn
2008 was as bad a year as any Bahamian investor could possibly fathom. Companies from just about every sector of the economy saw their share prices adversely affected by declining economic conditions that were plaguing not just The Bahamas, but the entire world.

The US subprime mortgage crisis spilled over into the wider mortgage market and ultimately resulted in a global financial crisis that saw both US and international banks collapsing one by one due to their inability to deal with the associated consequences.

Although a small number of banks and Bear Stearns had already failed during the first half of 2008, it was the collapse of Lehman Brothers–one of the biggest investment banks in the US–that really instilled fear in people. The images of some of Wall Street’s top investment advisors walking out of their offices with the contents of their desks neatly packed in boxes is an enduring image.

Stock markets around the world fell sharply and investors, fearful that the global financial system would collapse and that earnings would shrink substantially in virtually all companies, ran for the exit doors.

Those were uncertain times and, as is typically the case when things start to go bad, people only expected the situation to get worse.

2009: the turnaround
While the early months of 2009 continued to see sharp declines in global stock prices, massive stimulus packages arranged by global governments and their central banks started to have a positive impact on the global economies, and the credit markets started to thaw.

Notwithstanding these improvements, global unemployment continued to increase sharply. Tourism numbers and the amount of foreign direct investment fell in The Bahamas, leaving the average Bahamian investor in a general state of panic.

Many investors who bought into the market during the height of 2007 now saw much of those investments rapidly decline. Many Bahamian investors sealed their own fates and recognized substantial losses when they decided to sell these investments to avoid any further declines in value.

While it seems counter-intuitive, it was around this period that we started to enter a buyer’s market where, as a result of substantial declines in stock prices and a large number of sellers all seeking to exit the market at the same time, stocks were once again attractively priced.

International equity markets bottomed in March 2009, and in the last six months they have rebounded by approximately 50 per cent. While many Bahamian investors are still rushing for the exit, it is only a matter of time before they realize that there are actually great investment opportunities in the market and return as buyers.

2010: the present
There is still a certain amount of indecision and skepticism with regard to investing. But there are a series of questions investors can ask themselves that are designed to help crystallize their thought processes.

Firstly, do they feel as if those Bahamian companies whose stock prices are presently underperforming are doing badly because of poor company management or because of external economic factors? If the answer is because of poor company management, then their decision becomes perfectly clear.

However, if they feel that the underperformance was a result of external economic factors, then the second question to ask is whether or not they feel those external economic factors will last forever. If the answer is yes, then once again their decision is clear, but if the answer is no, then now just might be an excellent time to invest.

Hence the simple reality is this: By all indications 2007 was a peak in the Bahamian capital markets, while 2009 was a definite trough. Therefore if you have an expectation that the Bahamian economy will recover this year and eventually peak again, then quite simply, now is the time to invest.

The views and opinions expressed herein are those of Philip Dorsett and not necessarily that of Royal Fidelity or The Bahamas Investor.

Bio
Philip Dorsett
Philip Dorsett is an investment advisor with Royal Fidelity Merchant Bank & Trust. Before joining Royal Fidelity, Dorsett worked for three years as a securities trader and has extensive knowledge in international securities trading, private banking and international transfer agent services. He holds a Bachelor of Science degree in finance from the University of South Florida and he is a registered securities investment advisor.

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