Thread by @marcgayle

I got a few questions about this.

Why does it matter? What does it mean for you? Etc.

So per my modus operandi, here is a thread explaining the implications.

//Thread

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https://twitter.com/jastockex/status/1178736573111848960

The first thing you need to understand is:
- What is an index?

An index, in the context of the stock market, is simply a collection of stocks (companies). That’s it. Just a colllection. A basket if you will.

Indexes (or indices) can be made of various types.

In America there is the Dow Jones Industrial Average (DJIA) that tracks 30 large publicly owned companies that trade on the New York Stock Exchange (NYSE) - investopedia.com/terms/d/djia.a…

The S&P 500 tracks the 500 largest US publicly traded companies - investopedia.com/terms/s/sp500.…

There are many more. Why do people create indices? Because, at a glance, they act like a thermometer for whatever is happening in the economy that covers those indices.

For ex, if there is concern about a financial crisis approaching, it should show up in a financial index.

Anything that affects an industry, should show up in the movement of the index. If there is a tax cut for all banks/financial firms, you would expect to see the Financial Index rise.

The stock market is considered a forward looking indicator.

It gives us an indication for where economic conditions will be like in the future. This is why when the market rises or falls it affects people one way or another.

If investors are feeling nervous and uncertain about the future, the market tends to fall.

When investors are feeling confident about the future, the market tends to rise.

So indices give us a more granular view into the economy.

So back to the @jastockex announcement re: these two indices. There are a number of benefits.

For starters, the timing is right because GOJ has signaled that they want to encourage more firms in the domestic economy to be more robust. Manufacturing and distribution are two pillars of a strong domestic economy.

So as these indices grow, it bodes well for the gen. economy

These indices will also give us a birds eye view about how the economic environment is affecting these pillars of the Jamaican economy.

When energy prices rise, they tend to hit manufacturers hardest because they use a lot of energy. So their input costs will rise...

...which will ultimately squeeze profits, which makes investors less happy so they sell their stock and so the prices of their stocks go down. As that happens, the index will fall. So anything that affects manufacturers, we should see it show up in the index reaction.

Well that’s how it works in efficient markets anyway. But we can generally expect it to be similar in Jamaica.

So that’s the impact of just the indices in general.

But there is another layer to this.

Because indices cover all of the firms in an industry...

it provides diversification and risk-adjusted rewards. There are many investors, typically large investors, that want to invest in an industry but they don’t want the risk exposure that comes from owning a few stocks in that industry.

Here is an example of what I mean. In one of my recent Advanced Financial Masterclasses, I discussed this idea and I did up a table that perfectly summarizes the conundrum.

From the data below, you can see that the swings in returns for each stock is greater than the index.

So the index never provides with a return as high as the highest stock, but conversely it never provides a drawdown/loss as the lowest.

In this table we see $BIL.ja went from -1.52% in June, ‘19, to 100% in July ‘19, to -21% in August 2019. (Aside: DM me for class info.)

For many large investors (pension funds, insurance companies, etc.) those large swings can be heartburn inducing. They rather have slow and steady.

So, Sagicor created a Financial Index that tracked the entire financial sector called $SELECTF.ja.

The sole purpose of that fund is to track the JSE Financial Index. So if you don’t want to deal with the wild swings of $BIL.ja, you could just buy $SELECTF.ja and you get better risk-adjusted returns.

So when Sagicor did that, basically what happened is...

...they raised all this money (a few $B) and pumped that money into all of those stocks. So generally speaking, a few $B flowed into buying those stocks. That pushes up the price and adds liquidity (meaning makes it easier to buy and sell because more ppl are transacting in...

..that stock). More liquidity is good for the market. The more ppl buy and sell any stock is the better it is because that means whenever you want to buy and sell you can get in and out more easily at prices closer to what you want. So if you want to buy the index...

...you just buy $SELECTF.ja.

So, now that they have introduced both the Manufacturing and Distribution Indices, what will likely happen is Sagicor will float another listing/vehicle whose sole job is to track each index.

They will raise money for that and buy up those stocks.

Which will push up the prices (generally) of those stocks and also add to liquidity for each of those stocks.

Note I am not saying that every single stock will have a major increase in price, some may not depending on how much the new vehicle buys (which depends on the weight).

But I am just giving the high level overview of what can generally be expected.

We will have more liquidity flowing into the markets generally, and into these stocks in particular (even tho the biggest are relatively liquid), and we will likely see elevated prices of those cos.

Hope that provides some clarity.

As always, hit me with the questions.

If you want to learn more about this stuff and how it can help you manage your portfolio, DM me for more info on my class.

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