The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Stock market investors “should be expecting 10 per cent or north of 10 per cent” returns in 2014, a leading investment banker said yesterday, with Baha Mar’s impact effectively cancelling out any tax-related negatives.

Michael Anderson, RoyalFidelity Merchant Bank & Trust’s president, predicted that while Bahamian equities would likely match 2013’s performance next year, the factors driving those returns would be different.

While stock prices appreciated in 2013 largely because they were “underpriced”, Mr Anderson said next year’s increases and dividend yields would be driven by earnings growth stemming from the Baha Mar expansion.

While Value-Added Tax (VAT) concerns remain a potential impediment to the performance of BISX-listed stocks, the RoyalFidelity chief pointed out that the market had largely shrugged off the impact from the 2013-2014 Budget’s unexpected tax increases.

And he urged Bahamian investors to focus on the medium to long-term, taking a three-five year horizon, rather than worry about what the next six months may hold.

Noting that the listed equities market was up 6.4 per cent for the year to Friday, December 13, just from a capital appreciation (price increase) perspective, Mr Anderson said the likes of J S Johnson; AML Foods; Fidelity Bank (Bahamas); FamGuard; Bahamas Waste; FINCO and Arawak Port Development Company were all trading at annual highs.

“We have a bunch of stocks trading at 52-week highs, and a lot of the others ones are not far off,” Mr Anderson told Tribune Business.

As for dividend yields, Colina Holdings (Bahamas) leads the way at 7.4 per cent, followed by Commonwealth Bank at over 6 per cent. The comes J S Johnson with 5.7 per cent; AML Foods at 4.8 per cent; Fidelity Bank (Bahamas) at 4.7 per cent; FamGuard at 4.5 per cent; and Doctors Hospital at 4.4 per cent.

Mr Anderson said the capital returns on these stocks were matching the bottom end of the dividend scale on government and private sector fixed-income securities, which currently carry interest coupons of between 4.75 per cent to 6 per cent.

Combining dividends with capital appreciation, Mr Anderson said Bahamian stock market investors were receiving returns of up to 11-12 per cent.

Noting that dividend yields for BISX-listed stocks historically averaged around 4 per cent, the RoyalFidelity chief said: “I think it’s a fairly good indication of the remaining strength in the market, having dividend yields at that level.

“You’re going to end the year up 6-7 per cent on capital appreciation, and dividend yields of 4 per cent, so the market will end up close to 11 per cent returns.”

In comparison, Mr Anderson said bank deposits were paying a relatively low 2 per cent interest rate on deposits, further prompting investors to head for the stock market.

And prevailing price/earning (P/E) ratios also indicated there was “some reasonable upside” remaining for stock prices.

Mr Anderson said Colina Holdings’ P/E ratio was currently 5x, compared to the normal 10x, while Fidelity Bank (Bahamas) and FamGuard were at “just under” 10x and 9x, respectively.

“These are attractively priced stocks now, based on historical earnings, never mind going forward,” he said.

“If the economy grows as expected in the second half [of 2014], we will see further stock price increases based on that.

“We anticipate there’ll be a lag because of the tax-related issues being discussed at the moment, and people holding off until such time as things settle,” Mr Anderson added.

“The first half will be a bit of a struggle, but the Baha Mar effect will drive business and earnings in the second half.”

Calling on investors to focus on a three-five year horizon, rather than just six months, the RoyalFidelity president said: “2014 looks very similar to 2013 in terms of returns, and people should be expecting 10 per cent returns or north of 10 per cent.

“Stocks coming into 2013 were very much undervalued, and a lot of this year’s upside is because of that. Looking ahead, it’s much more about earnings growth as opposed to underpricing.

“People should get in today as there’s still a reasonable period of upside where they can hope to gain for the next few years. There is growth potential in terms of the underlying earnings. I think there’s a positive trend in the market for growth, and it will continue for the next few years.”