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Buy Gov't bonds, Bear Sterns exec urges investors
Julian Richardson
Friday, June 15, 2007
Dr Carl Ross, (left) senior managing director of Bear Stearns, shares in a discussion with Debra Lopez, NCB Capital Markets vice president distribution, and Adam Groothuis, Bear Stearns' managing director, at NCB Capital Markets' Emerging Markets Seminar yesterday. The function was held at the Terra Nova Hotel in Kingston. (Photo: Billy Perkins)
Against the background of Jamaica's high bond yields but weak economical dynamics, Dr Carl Ross, senior managing director of United States investment house Bear Stearns, has urged investors to buy the government's bonds for the short term.
Dr Ross, guest speaker at an NCB Capital Market's seminar on emerging markets held at the Terra Nova Hotel in Kingston yesterday, noted that while Jamaica's high yield debt continues to trade relatively higher than its debt rating peer group and above the benchmark Bear Stearns High Yield Index (BSIX), weak economical fundamentals made it a risky investment. Currently, according to Dr Ross, Jamaica's debt is trading close to 8 per cent while most of the countries in its peer group are trading just over 6 per cent and the BSIX is trading at roughly 6 per cent.
"My recommendation on Jamaica right now is that you should own it for the carry, for the incremental yield that you are getting over some of these other countries and over the benchmark index," said Dr Ross. "(However), don't own Jamaica betting on a significant fundamental improvement that we are seeing in other countries."
Dr Ross, who is also Bear Stearns' director of emerging markets and sovereign research, pointed to research that shows that Jamaica, whose international bond rating is B1/B, underperformed all the other countries in the select peer group of mostly single B sovereigns - the Dominican Republic, Uruguay, Indonesia, Brazil, and Turkey - in four key economical indicators: GDP growth, fiscal deficits, current account deficits and external debt to GDP ratio.
"Jamaica underperforms all these countries in GDP growth," he said. "It is significantly lower.fiscal deficits are larger while other countries are making significant improvements. Most of these countries had well under 2 per cent of GDP while Jamaica, last year, was above 5 per cent of GDP, and this year we don't know where it is going to end up, but let's call it between 4 and 5 per cent of GDP.
"Several of the countries are running a current account surplus, while some have fairly mild current account deficits, but Jamaica's current account deficit is significantly larger than all the others," continued Dr Ross. "We all know that the debt burden in Jamaica is significantly higher than the other countries... some countries have had massive turnaround in their external debt to GDP figures so their credit rates are increasing, but Jamaica, while they haven't gone up a lot, just cannot make a lot of progress on their external debt to GDP ratio."
It is partly due to these indicators why, in April, Bear Stearns, in its quarterly assessment of sovereign debt, downgraded its recommendation on Jamaican bonds to "underperform"; this after having an "overperform" rating on the island's debt throughout 2006.
"Throughout 2006 I was very bullish on Jamaica and had an outperform recommendation on Jamaica just about all year," said Dr Ross. "A couple of months ago we moved that recommendation to an underperform because we were somewhat alarmed and dismayed by the 2006/2007 fiscal numbers.
"I think there is a good chance that the fiscal numbers are going to improve this year, but what it means is that Jamaica's improvements in fundamentals are not happening as fast as other countries, so we had to tone down our recommendation" he added.
Dr Ross noted that emerging markets have significantly matured over the last four years, with a sharp decline in volatility. Factors, he said, which are catalysing this trend are the improved fundamentals in emerging market countries, the fact that investors are much better at differentiating risks, and that there has been an abundance of liquidity in the global economy that has put more money in the market. The major growth area is in corporate debt issuance, which has grown by 307 per cent since the beginning of 2006; sovereign issuance, during this period, grew by only 14 per cent.
"There is a clear dampening in volatility," said Dr Ross. "This has caused more people who used to think of emerging markets as an openly risky asset class that they wouldn't have touched, to feel that this is now a real maturing asset class that still offers some yield, and risk is falling, so it is something that they should be involved in."
Among a confluence of low risk alternative investment to Jamaican bonds in the emerging debt market, Ross specifically urged investors to look at Guatemala, Barbados, the Dominican Republic and Venezuela. In light of the political concerns surrounding the latter, Dr Ross said, "Their assets outweigh their external debts by about three to one. So tomorrow (Venezuelan president) Hugo Chavez can write a cheque and pay off all of Venezuela's external debt and still have about US$50 billion left over.
"To me, that is a very strong statement and I feel pretty safe that it is money that is good" added Dr Ross. "(Chavez) paid his debt, even when oil prices were US$10 and US$11 per barrel back in the late 1990s, so I think that is a pretty good sign that he places value in honouring his obligations and maintaining legitimacy."
Julian Richardson
Friday, June 15, 2007
Dr Carl Ross, (left) senior managing director of Bear Stearns, shares in a discussion with Debra Lopez, NCB Capital Markets vice president distribution, and Adam Groothuis, Bear Stearns' managing director, at NCB Capital Markets' Emerging Markets Seminar yesterday. The function was held at the Terra Nova Hotel in Kingston. (Photo: Billy Perkins)
Against the background of Jamaica's high bond yields but weak economical dynamics, Dr Carl Ross, senior managing director of United States investment house Bear Stearns, has urged investors to buy the government's bonds for the short term.
Dr Ross, guest speaker at an NCB Capital Market's seminar on emerging markets held at the Terra Nova Hotel in Kingston yesterday, noted that while Jamaica's high yield debt continues to trade relatively higher than its debt rating peer group and above the benchmark Bear Stearns High Yield Index (BSIX), weak economical fundamentals made it a risky investment. Currently, according to Dr Ross, Jamaica's debt is trading close to 8 per cent while most of the countries in its peer group are trading just over 6 per cent and the BSIX is trading at roughly 6 per cent.
"My recommendation on Jamaica right now is that you should own it for the carry, for the incremental yield that you are getting over some of these other countries and over the benchmark index," said Dr Ross. "(However), don't own Jamaica betting on a significant fundamental improvement that we are seeing in other countries."
Dr Ross, who is also Bear Stearns' director of emerging markets and sovereign research, pointed to research that shows that Jamaica, whose international bond rating is B1/B, underperformed all the other countries in the select peer group of mostly single B sovereigns - the Dominican Republic, Uruguay, Indonesia, Brazil, and Turkey - in four key economical indicators: GDP growth, fiscal deficits, current account deficits and external debt to GDP ratio.
"Jamaica underperforms all these countries in GDP growth," he said. "It is significantly lower.fiscal deficits are larger while other countries are making significant improvements. Most of these countries had well under 2 per cent of GDP while Jamaica, last year, was above 5 per cent of GDP, and this year we don't know where it is going to end up, but let's call it between 4 and 5 per cent of GDP.
"Several of the countries are running a current account surplus, while some have fairly mild current account deficits, but Jamaica's current account deficit is significantly larger than all the others," continued Dr Ross. "We all know that the debt burden in Jamaica is significantly higher than the other countries... some countries have had massive turnaround in their external debt to GDP figures so their credit rates are increasing, but Jamaica, while they haven't gone up a lot, just cannot make a lot of progress on their external debt to GDP ratio."
It is partly due to these indicators why, in April, Bear Stearns, in its quarterly assessment of sovereign debt, downgraded its recommendation on Jamaican bonds to "underperform"; this after having an "overperform" rating on the island's debt throughout 2006.
"Throughout 2006 I was very bullish on Jamaica and had an outperform recommendation on Jamaica just about all year," said Dr Ross. "A couple of months ago we moved that recommendation to an underperform because we were somewhat alarmed and dismayed by the 2006/2007 fiscal numbers.
"I think there is a good chance that the fiscal numbers are going to improve this year, but what it means is that Jamaica's improvements in fundamentals are not happening as fast as other countries, so we had to tone down our recommendation" he added.
Dr Ross noted that emerging markets have significantly matured over the last four years, with a sharp decline in volatility. Factors, he said, which are catalysing this trend are the improved fundamentals in emerging market countries, the fact that investors are much better at differentiating risks, and that there has been an abundance of liquidity in the global economy that has put more money in the market. The major growth area is in corporate debt issuance, which has grown by 307 per cent since the beginning of 2006; sovereign issuance, during this period, grew by only 14 per cent.
"There is a clear dampening in volatility," said Dr Ross. "This has caused more people who used to think of emerging markets as an openly risky asset class that they wouldn't have touched, to feel that this is now a real maturing asset class that still offers some yield, and risk is falling, so it is something that they should be involved in."
Among a confluence of low risk alternative investment to Jamaican bonds in the emerging debt market, Ross specifically urged investors to look at Guatemala, Barbados, the Dominican Republic and Venezuela. In light of the political concerns surrounding the latter, Dr Ross said, "Their assets outweigh their external debts by about three to one. So tomorrow (Venezuelan president) Hugo Chavez can write a cheque and pay off all of Venezuela's external debt and still have about US$50 billion left over.
"To me, that is a very strong statement and I feel pretty safe that it is money that is good" added Dr Ross. "(Chavez) paid his debt, even when oil prices were US$10 and US$11 per barrel back in the late 1990s, so I think that is a pretty good sign that he places value in honouring his obligations and maintaining legitimacy."
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