Capital assets
In less than one week, trading in the Guyana Stock Market will enter the final month of the year. It is a market in which there is some amount of competition for the resources of the investors. The prices at which the stocks sell tend to leave many out of the market. The rivalry in the market results in changes in ownership of the stocks. Too few seem to know much about the market or appear interested in what happens there.
As with any market, prices tend to rise and fall on the behaviour of investors. The stocks that are sold on the local exchange are capital assets so their value is also determined by the time value of the initial amount spent to purchase the stocks and the dividends that were expected to be received. These two latter factors are the drivers of demand and supply of the stocks. While the two variables are important determinants of the price of the stocks, it is the change in the initial investment that is more obvious in the movement in the market value of the stocks.
This change is often connected to perceptions about future economic conditions and the value it produces is referred to as the market capitalization of the stocks. Market capitalization gives ideas of the value of the companies. But it also gives ideas about the economy. It is thought of as a leading economic indicator. This article will examine the behaviour of the market up to October 2016.
Insufficient
Several companies participate in the market and their collective performance constitutes the view that is held of the stock exchange. Consequently, the discussion of the market will start with a look at the aggregate capitalization. There are 16 companies registered on the local stock exchange.
The market value of these companies at the end of October was $147 billion. One could think of the market capitalization as the money someone would have to pay for the 16 companies if he or she wanted to buy them all. In today’s market, the value of those 16 companies is insufficient to pay for the Amaila Falls hydropower project. Yet, these companies are of immense importance to the economy of Guyana.
The market value of the shares is sometimes considered a useful way of assessing the contribution of companies in the stock market to the national economy. A move in that direction would reveal that as at October 2016, the 16 companies would have contributed around 26 per cent of the gross domestic product (GDP) of Guyana. In other words, if the 16 companies went out of business, Guyana would lose more than a quarter of its output.
The services, manufacturing and mining sectors would all be adversely affected. Among the group of 16 companies can be found Globe Trust and Investment Company Limited which is a defunct company. Therefore, it is possible to contend that 26 per cent of Guyana’s GDP is coming from 15 and not 16 companies.
Several interpretations
Several interpretations are given to the ratio of market cap to GDP. One focus is the interpretation of the value of the stocks. Those who have written about the market cap-GDP ratio have drawn the conclusion that when the market value of stocks exceeds 100 per cent of GDP the stocks, more likely than not, are overvalued.
They have also drawn the conclusion that when the ratio is below 50 per cent, the stocks are highly undervalued. With a ratio of 26 per cent, one could conclude that the stocks on the Guyana Stock Exchange are woefully undervalued.
That situation points to real investment opportunities for persons who want to participate in the stock market. Many more persons should be trying to buy stocks through the stock market.
The other utility seen in market cap to GDP data is one that generates a great amount of debate. This refers to the market-cap playing the role of a leading economic indicator. The direction in which the market cap goes reflects both the confidence that people have in the economic ability of the company and the view that the company has about itself and the economy.
The two views are best obtained by observing the trends in the stock index. As such, one would have to examine the index, the Lucas Stock Index (LSI), that is prepared by this writer to get both the general and specific trends. The LSI is made up of nine of the 15 known viable companies in the stock market. The index therefore accounts for 60 per cent of the companies that are on the exchange.
Lack strong confidence
The grouping of companies that forms the LSI provides a good indication of the behaviour of the market because they contain over 70 per cent of the companies that trade actively on the market. The market capitalization for the 16 companies contracted by 2.76 per cent as can be seen from the data presented by the Guyana Association of Securities Companies and Intermediaries, Inc (GASCI) on its website for the period January 1 to October 31, 2016.
The LSI revealed that the nine companies that are part of the index lost more value than one would realize. The LSI declined by 2.86 per cent during the period of January to October 2016. The trend of the index suggests that investors lack strong confidence in the economic ability of companies to grow their revenues and profits.
Sluggish
Many persons would argue that the economy is sluggish and therefore offers businesses little chance of making progress. Naturally, the business environment in Guyana has changed with the change in government. However, a closer examination of the conditions would reveal that some areas of the economy that have been affected are largely under the control of private direct investors. The rice industry was slow to react to the emerging challenges of falling world prices and the aggressive behaviour of Guyana’s neighbour to the west. Rice producers must find more diversified markets and seek to develop value-added activities to utilize excess rice output.
The unwillingness to do so reflects the risk averse nature of private investors in that industry and the lack of an aggressive spirit to grow the industry. The strategy to find more markets for rice was slow to be implemented.
Long before the change of government, it was clear that the timber industry was operating in a questionable and unsustainable manner. Questions arose about the management of the industry and the behaviour of foreign investors towards the responsibilities that they undertook to fulfil. The conflict between words and deeds had to be remedied by the new government and brought adjustments to the sector.
Moreover, subsidies to the sugar industry are no longer treated as a given, as Guyanese have become conscious of the inefficiencies and uncompetitive position of the monopoly sugar producer in the country.
Changes to the way in which the industry operates are necessary if Guyana is to correct the ills of the economy. The irregular administration of tax concessions and the violation of tax laws needed to be corrected too.
Far too many innocent and honest taxpayers were being hurt by the misapplication and misuse of the tax laws. Honest investors were also being hurt by clandestine and inefficient customs operations.
Adjustments
The adjustments that are taking place in the economy are changes that leaders of the private companies operating in Guyana should have anticipated. The factors that are being changed were known to all and people were conscious of the negative effect that they were having on the economy. The management of the firms in the index must therefore take some responsibility for the poor showing of their stock prices.
It must be kept in mind that they are entrusted with the resources of the companies that they run and it is their responsibility to be creative to move their companies forward. This responsibility is theirs primarily because most of them rely on internal equity, money that they control, and not the stock market to run their companies.
The burden falls on management to find ways out of the economic challenges that they encounter. Their long-term financing strategies suggest that they have the money to make the adjustments necessary to energize their companies.
Contrast
Some amount of attention ought to be paid to four companies in the LSI for the negative or inconsequential impact that they have had on the index. The largest decline was seen in the stocks of Republic Bank Limited (RBL).
The value of this stock declined over 23 per cent over the review period. The competitor entity, Guyana Bank for Trade and Industry (GBTI), lost four per cent over the same period while Citizens Bank Inc (CBI) made no contribution to the market capitalization of the companies.
Demerara Tobacco Company (DTC) also made no contribution to the market capitalization. In contrast, Demerara Bank Limited (DBL) added six per cent to the market capitalization of the companies in the LSI. The manufacturing companies made positive contributions too by adding an average of six per cent to the LSI.
Different economic changes
It would appear therefore that the service industries did not know how to respond to the challenges brought on by the different economic changes that occurred in the country and the efforts by the new administration to correct its dysfunctional management. They should take stock of the changes and make the necessary adjustments that would aid the economy.
