Archives for June 2018

Apartment complex in Kingston – Real estate values to benefit from low interest rates.

Declining interest rate is a huge buy signal for both stocks and real estate investments. If the decline in rates is expected to be prolonged then investors will swicth their investments to take advantage of opportunities elsewhere.
Last year this publication boldly advise readers that the drop in interest rates by the central bank was a huge buy signal for stocks and that investors should be piling into stocks and real estate. Some were skeptical, clearly unaware that there are really two major factors driving stock prices – interest rates and profits. Interest rates have fallen to the lowest levels on record, in Jamaica.
Many who consider the present values of stock to be ioverpriced not factoring the major cahnge the falling rates will have on valuations of both stocks and real estate. A few companies may overpriced currently, but not the vast majority. The incredibly low interest rates being enjoyed by many Jaamicans are not about to change substantially, any time soon. While the low rate of 1.7 percent on treasury bills reached in 2018 won’t last forever, it is expected that it will not go up too far from current levels of just over 2 percent, any time soon.
In May last year, Bank of Jamaica cut the overnight policy rate, by 25 basis points to 2.5 percent that along with a decline in short term Treasury bill rates at the same time.
IC Insider.com stated then, that the moves provided more ammunition for a big surge for Jamaican stocks. The piece went on to state that with a 15 percent fall in BOJ’s policy rate in 2018 so far, stocks are lagging behind, with an increase of just 6.6 percent for the Junior Market and 4 percent for the main market.
The fall in Treasury bill rates was far greater than the rise of the All Jamaica Composite Index, an indication of a lot more upside for stocks based on the downward movement of interest rates.
Investors seem then to be focusing more on profits in valuing stocks than on interest rates so far. That will change the article suggested. The fall in the overnight rate at that time, translated to a 9 percent rise in stock market prices, but rates seem likely to decline some more before settling off, providing more ammunition for greater gains in stock prices.
We stated that with the fall in interest rates, the PE of money is at the high end 40 times income and using corporate bond rates around 12 times, but the PE ratio should be more tied to Treasury Bill rates and that PE is now in 30 range but stocks are mostly in the low teens and below. IC Insider.com further stated that most investors did not appear to be paying much attention to the tsunami that was on the way that will see prices move sharply higher.
With just over five months of 2018 passing, investors have not only warmed to the fall in rates but many are not willing to part with their stocks. Late comers to the party will pay much higher prices than in May and June. Then the Junior Market was up 24 percent and the Main market 31.7 percent and rising. Technical reading of the market suggest that the Main market has another 25 percent run to make before probably cooling for a charge to 720,000 points on the All Jamaica Composite Index in 2019.
The fall in interest rates makes it cheaper to buy real estate with lower interest rates for each dollar borrowed. Additionally, investors will switch funds from fixed interest investments into stocks and real estate thus driving up their values.
Note that this is an updated version of an article posted last year after Bank of Jamaica cut their overnight policy rate.