OP-ED CONTRIBUTION: COVID & INVESTMENT Time to be market wise, not cash foolish
THE CORONAVIRUS disease COVID-19 is not only responsible for thousands of deaths, displacing millions, grinding industries to a halt and furloughing a significant proportion of the world’s labour force, or in some instances compelling others to accept wage cuts from their employers just to stay afloat of these terrible economic times, it has also annihilated investments on international stock markets.
The impact of the disease five months into its emergence is much publicised globally; and the Jamaican stock market and the economy, too, are being clobbered.
Within two weeks after the first COVID-19 case was announced in Jamaica on March 10, the once burgeoning Jamaica Stock Exchange, JSE, went into free fall. During the said 14-day period, the main market index, junior market index and JSE combined index all plummeted. During the period March 10 to 24, the three indices fell by 15.41 per cent, 13.58 per cent and 17.71 per cent, respectively. This resulted in a respective mammoth change of 2,575.13 per cent, 1,020.63 per cent and 4,548.47 per cent between the said two-week period in 2020 relative to 2019.
Stock market indexes in reality are surrogates that measure the average performances of a portfolio of specific stocks on a particular stock market. However, while these indices measure the average performance of a portfolio of stock within the particular market, their behaviours might not actually represent the performances of an individual stock. Still, they are really a good measure.
Nevertheless, what these indices indicated was that, on average, the value of stocks on the JSE took a significant nosedive during the aforementioned two-week period.
The performances of stocks on the JSE during the latter two-week period in March 2020 suggested a rather bearish stock market. A bear market is characterised by uncertainty and lack of confidence, which results in investors selling their stocks in anticipation of a further decline in prices, and unwillingness by other market participants to purchase the securities being offloaded. In a bear market, investors generally extract their monies from the stock
LOOKING FOR OPPORTUNITIES
market to purchase bonds or hold cash. However, the fall in confidence at the advent of COVID-19 resulted in most investors deciding to hold cash rather than migrate to fixed income purchases.
Notwithstanding the severity and brutality of COVID-19, it presents unique investment opportunities. Some investors exacerbate the financial effects of the stock market due to naivety by selling shares to alleviate further price declines.
In fact, these price declines are unrealised losses, which in reality only occur on paper. Though investors’ net worth would have been affected in terms of market values, these losses really do not occur unless the shares are sold.
Stocks are long-term investments, which are highly volatile. Prices are likely to rebound in the future, hence periods of price declines present opportunities to invest in value stocks.
Nevertheless, some local investors acted inversely, thereby incurring huge losses during the initial two weeks of COVID-19.
What is worse, some of the monies that were extracted from the stock market are held in bank accounts, which generally provide negative real rates of return. Negative real interest rates emanate from the nominal interest rates received by savers that are less than the actual inflation rates in Jamaica.
While it is understandable that persons may want to bolster their cash during these unprecedented times, the precautionary cash balance required is, at most, six months’ living expenditure. This is really to stave off any negative eventualities in worst-case scenarios where persons are not earning additional income.
Having cash in excess of one’s precautionary cash balance generally elicit negative rates of return, given that there is an opportunity cost of holding cash, especially when it could have been more appropriately invested in places such as the stock market.
While it is unquestionable that investing in stocks during these prodigious times cannot replace the numerous lives lost, millions displaced, poignancy, looming economic collapses and severe social costs, persons should be penny wise. Notwithstanding some local investors are being penny wise, others are pound foolish to realise significant losses when selling their stocks to receive negative returns on the large cash balances that are currently held in their savings account. Investing in stock at this point might not be the sole panacea to alleviate the impending recession which is lurking after COVID-19, but it may provide a catalyst for expeditious economic recovery during the post-pandemic period.