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Perfectly Imperfect Market
Sunday 29, September 2019

Perfectly Imperfect Market

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When you consider a perfect market, you may be expecting that everyone has access to the same information, and you probably assume that good news will drive up the price of a stock, and bad news will cause it to go down.  If you stay glued to CNBC or Bloomberg on your television, you will see that the U.S. stock market reaction to bad news or good news is very swift.  This is especially so because the U.S. has a more developed market than Jamaica, and fortunately, Jamaica does not yet allow investors to “short” a stock. 

Let us examine one particular stock.  On November 8, 2018, NCB reported a record profit of J$28.6 billion!  This, of course, became the talk of the market.  However, what is more interesting is how long it took for the price to increase.  The price increased from J$125 to J$130 the day of the announcement, which is a mere 4% increase.  For most of November, an investor could have purchased the stocks somewhere in 130s. Then it meandered somewhat, not peaking until December 4th, 2018 when it finally peaked at J$159.62.  What is the point of this illustration?  You would not get that amount of time trading in the U.S. markets, as they have extended trading hours after the market closes and before it opens on a particular day.

Looking at the same stock, NCB, we waited for a little for the Guardian deal to close, but the closure of the deal was announced on May 14th, 2019.  So, what happened with the price? On May 14, 2019 the stock closed at $149.68. The price did not pass J$150 until May 24,2019.  Many analysts believed that the stock was underpriced and there were numerous whisperings of J$200 as a reasonable price.  However, it did not hit that price until July 11, 2019.

What accounts for these things?  Well, a large percentage of the stock market investors are pension funds-they are not always able to move quickly, as they have red tape to go through before they can move, conduct analyses etc.  In addition, most of the pension funds tend to buy and hold stocks rather than actively trade them and that tends to limit the velocity of price movements.

The long reaction time to announcements is actually not a bad thing.  The fact that the market is slow to respond is actually a great opportunity for retail investors.  If you exercise a little patience, if you stay on top of market announcements, you will see that there are opportunities that you can jump on before all the news is priced in.

The Wigton IPO opened the door for a lot of retail investors, who previously would not have considered participating in the stock market.  The Wisynco IPO also helped to energize the market.  The expectation is that these new investors will invest in other issues and educate themselves as best as possible.  The Jamaican stock market may not be perfect, but it is certainly perfect for some money making!

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management.  Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor.  Visit our website at www.sterling.com.jm  Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.

 

 

 

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