Experts at JMMB Elevate 4.0, Urge Investors to Convert Cash to Investment Instruments to Capitalize on High Interest Rate Environment

During the recent  JMMB Elevate 4.0 virtual, financial empowerment event panellists Dr. Damien King, executive director of the Caribbean Policy Research Institute (CAPRI) and Theodore Mitchell, sovereign research analyst at JMMB urged investors to identify opportunities even in a high-interest rate environment, by investing instead of saving.  

Like much of the global economy, Jamaica is experiencing a high inflationary period. Recent local quarterly data released by the Statistical Institute of Jamaica (STATIN) puts inflation at 8.5% well above the 4-6% inflation target. In response, the Bank of Jamaica (BOJ) has aggressively increased interest rates three times in the last 5 months, in a bid to dampen inflation, by reducing demand in the market.

Low Inflation is Good for the Economy 
Dr. King in supporting the position of the BOJ to increase the interest rate advocated that “(a) low inflation rate is critical to sustaining long-run growth,” as this allows for predictability in the economy and long-term planning for businesses and individuals alike.  He noted that although there will be short-term fallouts, such as increased cost for borrowing for both individuals and the government, in the long-run it would augur well for a stable economy as the bottlenecks created due to supply chain issues and the pandemic subsides. 

Mitchell, while agreeing with his fellow panellist’s view of the benefits of low inflation, expressed a diverging view on the timing of the BOJ’s intervention in the economy. “I don’t think that this (increased interest rate) is needed at this time, based on the source of the inflation,” he stated.  This view comes against the backdrop of the Jamaican economy still being in recovery mode, due to the pandemic and the reduced government earnings; in addition to the increased cost of financing government projects that are needed to further stimulate the economy with the increased interest rate. 

Invest to Hedge Against Inflation
Against that backdrop, both panellists therefore encouraged the audience to reduce their cash holdings and instead invest those funds in stocks, bonds, real estate, alternative investments or the productive sector, to adapt to these economic conditions and safeguard their wealth.

Inflation is defined broadly as the rate of increase in the cost of goods and services, whereby high inflation erodes purchasing power. “You (therefore) don’t want to hold on to cash during a high-interest rate environment, you want to be investing,” stated Theodore Mitchell. As investing allows investors to regain lost ground and hedge against inflation, while building wealth...The panellists were quick to note that while entering the stock market may seem scary for beginners there was no need for panic, instead combat fear with knowledge. Social media is not just for entertainment but also provides a wealth of information on a multitude of topics including stock market investing, inflation and interest rate. 

King further noted, “In a high-interest rate period, one must cut back on his/her expenses and become a ‘supplier of interest’.” New investors were encouraged to therefore to allocate a portion of their portfolio to debts instruments, such as bonds, while high inflation persists for better returns. A bond is a fixed instrument investment that is used by large companies and governments to finance projects and operations, by essentially borrowing from individuals and repaying those investors at a set rate of return at intervals. This interest payment which is usually made annually is known as a coupon payment.

Holding assets in foreign currency (FX) is another viable strategy during these times to diversify one’s portfolio and hedge against inflation. Foreign assets can also be accessed through a variety of overseas-based instruments like unit trust and mutual funds offered locally or held directly. “If the local currency is expected to depreciate you want to be in a place where you are actually generating returns from a US dollar perspective…,” outlined King. 

A balancing act must be maintained cautioned Mitchell in responding to the question of using foreign currency to hedge against inflation and depreciation of the Jamaica dollar. Noting that the hoarding of foreign exchange further drives depreciation of the Jamaican dollar, which is not in the country’s overall best interest. Moderator of this panel discussion, Kalilah Reynolds, CEO of Kalilah Reynold Media, therefore encouraged individuals to explore options of earning in foreign currency which is beneficial to the investor and country, as it increases the supply of FX in the market while allowing the individual to hedge against depreciation. She pointed to her YouTube channel as a viable foreign exchange earner and encouraged other creatives to explore this option.

The final decision of which mix of assets (stocks, bonds, foreign currency, alternate investments, real estate) will come down to your research and risk tolerance, and admittedly some trial and error to refine your investing game. 

A key takeaway from the discussion, for the hundreds of online attendees, is Jamaica’s micro and macroeconomic conditions will likely persist for the next 12 to 24 months and as such all soon-to-be investors and well-thinking financiers, amateur or professional, should be looking to increase investments to strengthen their position and level up their wealth.