Comparing the performance of stocks in the local market to stocks on the S&P 500, one local analyst said that while this U.S. index had seen a downward trend in recent months, local stocks appear to be moving upwards.
In a presentation to the West Nassau Rotary Club on Thursday, Michael Anderson, CEO of Fidelity Capital Market, said that in comparison to the FINDEX, a local index created by Fidelity which has seen a steady increase since mid-2003, the S&P 500 appears to be in a continued downward trend. According to a report by Bloomberg News, the S&P has fallen 4.1 per cent this year and companies in the benchmark are now selling for 19 times earnings, the lowest in close to eight years. In comparison to this, BISX all-share data for the first six months of 2004 saw an increase of 12.08 per cent.
Despite the positive outlook, however, Mr Anderson said there was still a divergence between the prices of the equity listings and earnings. He said that while typically in a capital market one would expect a very high correlation between the underlying earnings per share and its price, the Bahamian market had seen a trend where the price/earnings ratios were experiencing a downward trend. Using the banking sector as an example, he said that the sector as a whole had displayed a divide between the earnings of the institutions and the price the stock traded for on BISX.
Giving a visible example of the downward earnings trend, Mr Anderon said that British American, which is owned by the Fidelity Group, saw some correlation until 2002, when the price fell off despite the fact that earnings during this time period remained unchanged and had even begun to trend upwards. He gave the same assessment of Commonwealth Bank, explaining that, even though this stock had seen a steady price appreciation in recent months, it still had a price/earnings ratio of 12.
Mr Anderson listed other sectors traded on BISX experiencing the same problems, namely J. S. Johnson and Cable Bahamas. He gave one reason for the anomaly as the huge oversupply of equities and the lack of buyers.
Also agreeing with the divergence between price levels and earnings, Julian Brown, president of Benchmark Ltd., a closed ended equity fund, said this trend was typical in developing and emerging capital markets. According to Mr Brown, a security only has value if investors perceive that there is value in it; and while in more mature markets investors use fundamentals like price/earning ratios to determine the intrinsic value of a stock, this type of valuation is worthless if investors do not pay attention to it.
Describing Bahamian investors as emotional investors, Mr Brown said dividend yields, levels of liquidity and the perceived importance of the company were the elements looked at when a decision was being made to investing in a particular company. He encouraged, however, that this situation would gradually change as the market and investors became more sophisticated. While the local capital markets await this change, Mr Brown suggested that, as new products were introduced, a deliberate attempt be made to win Bahamians over to the reality that investing was a good thing and care taken in educating investors on the correct reasons and methods of investing.
He added that if this was not done, each time an investor ventured into the equity market for the wrong reasons, their reactions could end up setting an emerging capital market like The Bahamas back years.
Martella Matthews, The Nassau Guardian
