Investing misconceptions dispelled in 2019

2019 dispelled three huge misconceptions about investing:

•    The Jamaican stock market is more attractive than the US stock market
•    Bonds can’t deliver growth
•    You can’t lose with real estate

JSE VS US STOCKS

In 2019, the S&P 500 delivered a higher return to investors for less risk than the Jamaica Stock Exchange (JSE).

During 2019, the S&P 500 index returned 28.9 per cent in US dollar terms. The JSE returned 34.3 per cent in JMD terms. However, inflation was roughly 6.2 per cent (suggesting the real return was 28.1 per cent) and devaluation was 3.8 per cent.

Of course, that excludes the six per cent of broker fees you pay on the way in and out as well as a liquidity discount.

The local stock exchange has appreciated by over 46 per cent per annum over the last five years. There is no doubt that it is an excellent tool for wealth creation.

Interestingly, if we look at the last 17 years, the cumulative average growth rate of the Jamaica Stock Exchange is closer to 15.3 per cent. The inflation rate over that period is 8.7 per cent.

Investors want to know where to look for growth.

The International Monetray Fund (IMF) projects that the global economy grew at a rate of 3.3 per cent in 2019.

It also estimates that the Jamaican economy grew at a rate of 1.7 per cent in 2019.

If we use data to make investment decisions, investors looking for growth also need to look outside of Jamaica.

BONDS
US dollar bonds delivered double-digit returns in 2019 thanks to price appreciation.

In 2019, the 10-year US Treasury returned 9.64 per cent and 10 year Baa-rated corporate bonds returned 15.33 per cent. (During 2019, bond mutual funds rose as much as 17.8 per cent in US dollars on the year.

There is a widespread misconception that bonds cannot deliver growth. It is a mantra repeated by the most sophisticated investment managers and investors. The data clearly states the opposite.

In fact, many large, local pension funds scoffed at the opportunity to enter the global bond market during the softening in late 2018 and early 2019.

Bonds are not mutually exclusive to equities. Rather they provide a lower (relative to equity) risk tool of wealth creation.

REAL ESTATE
Real estate prices have started to rise above their historical average.

According to the BOJ’s index of real estate prices, real estate prices in Jamaica rose by 10.28 per cent between June 2018 and June 2019.

This is great for existing holders but not so great for new buyers.

This is also 128 per cent higher than the six-year average increase of 4.5 per cent.
Let’s take an anecdotal example (we’ve shared before).

During 2019, a local newspaper reported the real estate holdings of a politician.

The newspaper stated that the politician’s family purchased a property (land and home) for $3.6 million in 1991. As at December 31, 2018 the property value was $58 million.
Fantastic return? Think again.

In 1991, $3.6 million was worth US$352,250.49. In December 2018, J$58 million was worth US$454,132.03. That is a return of 0.95 per cent per year for 27 years. That is less than the rate of inflation in the US over the period (roughly two per cent).

If you had invested US$352,250.49 at two per cent per annum in 1991, you would have US$601,251.59 in December 2018 (or 70 per cent more than the initial investment).

Whether we look at the data (an average increase of 4.5 per cent since 2013) or at anecdotal examples and discount them for inflation, real estate is not a fool proof way to make money.

Marian Ross is the vice-president of Trading & Business Development 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

http://www.jamaicaobserver.com/article/20200202/ARTICLE/200209969