At the start of July last year, the Jamaica Stock Exchange main market PE ratio was just 12 times that year’s estimated earnings and it has climbed 29 percent to 15.5 currently.
The rise in main market PE is leading some investors to be concerned about the value of many stocks, but they need not be as the main market is priced well below the 45 percent fall in Government of Jamaica Treasury bill rates since June last year. Not only that, since interest rates peaked at 9.11 percent in 2014, Treasury bill rates declined 400 percent while the main market stocks are up 520 percent but PE ratio of the main market is up only 160 percent over the same period, an indication that the main factor driving stock prices is increased profit and that the fall in interest rates has played much lesser role than profits.
Profits have been rising and interest rates have dropped with the 92 days Treasury bill for last year June, yielding 2.656 percent and currently 1.836 percent, a sharp 45 percent fall.
Growth in profit is the main reason for JSE rise since 2014.
What this suggests is that the PE ratio of the main market far from overvalued, is set to rise to 18 to 20 times current year’s earnings by the end of the year. The market valuation is well below the fall in interest rates and therefore has a far way to go before topping out.
Interestingly, while the Jamaica Stock Exchange main market stocks surge higher, the Junior Market PE at 11 times last year’s earnings at mid-year is still around the same level currently and trailing by a wide margin the main market stocks. This has huge implications for increases to come from the Junior Market as investors eventually bid these stocks up to reflect the sharp fall in interest rates and rising profits.
