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Leslie is an enthusiastic financial service professional with over 5 years in the banking and investment industry combined. He considers himself a service ambassador and is very passionate about the financial well-being of individuals.
Leslie is guided by the philosophy, to always strive to improve yourself to become better today than you were yesterday.
Stagflation is characterized by slow economic growth and relatively high unemployment or economic stagnation which is at the same time accompanied by rising prices (i.e., inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).
Leslie Walker Wealth Advisor
We go to the supermarket every week and it seems like we are spending more for the same things we always buy. Frequently we hear the term “inflation” used as the explanation, but what is inflation?
Investopedia defines inflation as “the decline of purchasing power of a given currency over time”.
It is a metric to measure how much more we will have to pay over time for the same basket of goods or to use a service. Explained simply, in 2012, when you had $1,000, you could get 10 beef patties. Now, in 2022, you may only be able to purchase four beef patties with the same $1,000.
Low, consistent, and, most importantly, predictable inflation, according to most economists, is desirable for an economy. When inflation is modest and predictable, it is easier to capture it in price-adjustment contracts and interest rates, which reduce its distorting effect. On the flip side, aggressive inflation erodes business and slows down an economy. The Bank of Jamaica’s primary policy objective is maintaining low and stable inflation, a policy called inflation targeting.
Although it is hard to avoid inflation, there are certain things you can do to reduce its impact on your money. Here are tips you can employ to help you survive inflation.
The first and most important step to surviving inflation is to consider your income and evaluate your spending habits. With the price of many things on the rise, now is the time to be frugal.
A great way to help you to have oversight of your spending is to create and stick to a budget. Your budget is a working document and should be reviewed each month. It is one of the most important tools in establishing a prosperous financial future because it allows you to make the most of your money.
Categorising your expenses as follows will guide you to cut back:
• Fixed committed expenses
• Variable committed expenses
• Discretionary expenses
Fixed expenses are, as the name suggests, a fixed amount each month, such as your mortgage or rent. Variable expenses vary from month to month based on need, for example, groceries and gas. Discretionary expenses are those that make life more enjoyable, including leisure activities, and they should be the first to adjust while catering to the holistic self.
Examine each expense category and look for items that can be reduced or eliminated. Be a bargain shopper; look for less expensive substitutes for necessities. Some supermarkets offer discounts on fresh produce on select days. Also, use your loyalty cards when making purchases as these give you discounts and/ or cash back and some utility companies give early payment discounts; take every opportunity to access these savings.
When inflation is high and rising, central banks can use contractionary measures to temper consumption, usually by hiking interest rates. Higher interest rates cascade to consumer credit products, such as loans and mortgages, as the cost of borrowing rises, making them more expensive to maintain and access.
I am tempted to say no new debt, as debt, if not managed properly, can set you back on your financial journey. New debt adds a new monthly obligation to your budget and limits your financial flexibility. However, if you must get a loan, avoid variable rate loans in a rising interest rate environment and only take on loans
that will add value, like an investment and a mortgage. Stay away from consumption loans, such as those for recreation or to purchase furniture.
For existing loans, see how best you can try to pay off high interest debt (eg credit cards), reduce the balance significantly, or consolidate into a lower rate personal loan with predictable payments.
Finally, always pay in full and on time. This simple tip can save you money on late fees.
Do you want to buy a new car, or do you want to remodel your kitchen? If you have not already begun that process, now may not be a good time to start, especially if you are thinking about taking on a loan to achieve this. Purchasing a car or new furniture during this period might leave you more susceptible to higher prices.
You should always invest, and an inflationary environment is no exception. An investment rule of thumb is to keep three to six months’ spending in an emergency fund that is accessible, and if you have
savings that you do not expect to use for a year or more, you should consider investing those funds.
During inflation, higher interest rates may apply to deposit accounts as well, implying that financial institutions may begin to give higher interest rates on savings accounts, repurchase agreements, and other fixed income investments. While variable rates on loans should be avoided, variable interest rate investments can help you to maximise your return if interest rates are expected to increase. Investors should consider investing in the Government of Jamaica treasury bills and debentures which are offered as auctions.
A debenture is a bond issued by the Government to raise funding and typically has an auction feature in which investors can bid/request the yield they desire. The treasury bill also utilises an auction approach and is a guide as to the rate investors are demanding.
It is important that you consult with an investment advisor to seek personalised investment strategies to help you navigate. In your discussions, consider holding shorter-term bonds, dividend-paying equities, and funds to capitalise on any investment opportunities as they arise. Regardless of whether inflation rises or falls, it is a good idea to keep an eye on strategies to improve your savings.
Originally published in the Jamaica Observer Aug 28, 2022.
The Volkswagen (VW) emissions scandal of 2015 is the second largest automobile scandal and cost the company an approximate €30 billion. In what was dubbed the “diesel dupe,” VW installed software in its diesel engine cars that could detect when they were under testing conditions and would change the cars’ performance and readings accordingly. Under testing conditions, the cars would meet strict US emissions criteria. However, they emitted nitrogen oxide pollutants up to 40 times the US legal limit. Once the faulty software was discovered, VW had to immediately recall millions of cars worldwide which cost the company €6.7 billion. The company also faced fines from the Environmental Protection Agency (EPA) of up to USD 18 billion (€16.2 billion) initially and continued to face fines and court settlements related to the scandal up to as recently as 2020. Due to this scandal, the company reported its first quarterly loss in 15 years of €2.6 billion. Profitability continued to suffer, and it took 2 years to recover.
While the financial consequences were substantial, the reputational ones were far worse. VW had implemented this strategy to gain market share in the USA. The plan backfired and the company’s reputation was tarred. Immediately after the scandal, VW, under a new CEO, had to aggressively work on rebuilding its branding and customers’ trust. It became known as making “cute, beetle-like cars” and was all but shunned from the environmentally conscious community. To rebuild its brand, it had to participate in expensive commercials and sponsorships like the Super Bowl. Investors also took a hit. The stock which had closed as high as
€241.70 in the weeks leading up to the news, fell as low as €92.36 in the weeks following the scandal; a 61.7% decline. It took over five years for the stock to recover to a high of 245.05 in April 2021.
Scandals like this help to build a strong case for ESG Investing. ESG Investing has become a buzz word within the investment community, especially over the past 5 years. The term, which was first coined in 2005, refers to the integration of responsible environmental, social and governance principles into investment decision making. According to Bloomberg Intelligence, global sustainable investment now amounts to over USD 35 trillion worldwide, up from USD 30.6 trillion in 2018 and USD 22.8 trillion in 2016, to become a third of the total global assets under management, showing the meteoric rise of this investment philosophy. The acceleration in growth has been driven by heightened social, governmental, and consumer attention of the broader impact of corporations, investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success.
ESG investing grew out of similar investment philosophies like Socially Responsible Investing (SRI) that place emphasis on the values of the company being invested in. Earlier models typically used “value judgement” and negative screening to choose companies. ESG investing and analysis, on the other hand, looks to finding value in companies, not simply supporting a set of values. That is, ESG investing evaluates a company based on ESG criteria along with traditional financial analysis.
The E in ESG represents the environmental considerations in making an investment decision. This area focuses on the company’s practices towards global environmental sustainability. Investors evaluate the company’s response to climate change and carbon emissions, air and water pollution, biodiversity, deforestation, water management and water scarcity.
The social aspect, the S, considers how the company treats the people it touches, customers, employees and the community, and the relationships formed between these groups. Here, the company’s social corporate responsibility, customer satisfaction, data protection and privacy, diversity and employee engagement among other factors are evaluated.
Governance is the G in ESG. This refers to the people and the methods that run the company. Under governance, an investor examines the competence and composition of the board and related committees, executive compensation, political contributions, operational transparency and any situations involving malpractice such as bribery and corruption.
A strong ESG proposition correlates with higher equity returns and reduced downside risks, as seen by lower loan and credit defaults and higher credit ratings. How does ESG integration provide greater returns? ESG principles link to financial performance in 5 main ways, top-line growth, cost reduction, minimization of regulatory and legal interventions, increasing employee productivity and through the optimization of investment and capital expenditures.
A strong ESG proposition helps companies to tap into new markets and expand existing ones by gaining access, approvals and licenses that afford fresh opportunities for growth. If the principles of a company align with that of regulatory and government agencies, then they are more likely to receive funding and government contracts. In addition, companies may be able to receive higher margins on products sold. If able, customers are willing to pay a higher price for “green products,” if they provide the same functionality and performance as their “non-green” alternatives.
Effective ESG implementation is also linked to cost reduction or, at the very least, preventing increases in expenses. Effective execution of these principles can reduce the cost of raw materials or more fixed
type costs such as the cost of energy. The significant correlation between resource efficiency and financial performance drives this proposition. In early 2020, Caribbean Assurance Brokers tapped into the Jamaica equity market through an Initial Public Offering. Some of the proceeds were raised to expand the company’s current solar panel system, which now provides 60% of the company’s energy needs in 2022. This project is estimated to have produced cost savings in the region of 70% to 85% of the company’s electricity bill prior to the expansion. Management also stated intentions of selling any excess power generated to JPS.
ESG practices reduce the risk of regulatory and legal interventions. A strong value proposition can enable companies to achieve greater strategic freedom, easing regulatory pressure. In fact, ESG helps reduce companies’ risk of adverse government action. One of the most publicized ESG violations locally, was the oil spills in the Kingston Harbour in 2016. After an initial probe, the National Environment and Planning Agency (NEPA) considered legal action against the company at fault. For VW’s violations, it faced costly legal action, reputational damage and came under closer scrutiny from regulatory officials.
The relationship between a company and its employees, as supported by a strong ESG proposition, can help companies attract and retain quality employees, enhance employee motivation and increase overall productivity. Employee satisfaction not only increases productivity but is also linked to an increase in shareholder returns.
Lastly, through ESG integration, companies can achieve higher returns by investing capital into more promising and sustainable opportunities. It can also help companies avoid investments that may not pay off due to longerterm environmental issues.
The VW scandal highlights the need for ESG analysis when investing. Even prior to the scandal, the company received low ESG ratings from MSCI, a global rating agency, due to controversies associated with product and service quality, bribery, fraud and collective bargaining. Immediately after the scandal, the company announced an ambitious target, it would produce 22 million electric vehicles across 70 models in the next decade. The company also introduced an ESG framework and produces a sustainability report yearly to share its progress in this area. In its revised 2025 strategy, the company wants to grow under 5 main pillars: Best Governance, Best Performance, Best Brand Equity, Software-enabled car company and Excellent Leadership. It also plans to be carbon neutral by 2050. Under this strategy, VW intends to earn Operating return on sales between 7-8% in 2025 versus 6% in 2015, and a Return on investment in the automotive division of more than 14% versus a negative return in 2015.
The Government of Jamaica (GOJ), through the Ministry of Finance (MOF) reopened three fixed rate benchmark interest notes during August. The GOJ FR 4.50% 2025 was 1.15 times oversubscribed, with $3.46 billion worth of bids chasing $3 billion in offer. The weighted average yield was 8.73537% with the highest successful bid being 8.999%. On the other hand, the GOJ FR 9.625% 2031 and the GOJ FR 10% 2037 were undersubscribed, receiving 0.74 and 0.51 times respectively.
Coming out of the BOJ’s Monetary Policy Committee (MPC) meeting in August, the central bank added 50 basis points to the overnight policy rate, which is now 6.00%, a rate deemed appropriate by the Bank. The BOJ, while maintaining its commitment to price stability, outlined its plan to pause the series of rate hikes if domestic inflation continues to trend downwards.
The Jamaica Stock Exchange (JSE) Main Market index declined by 16,398.72 points or 4.56% in August, from trading in 64 stocks of which, 20 advanced, 38 declined and 6 traded firm. Pulse investments Limited (PULS) was the volume leader with 358.25 million units traded, followed by Sagicor Real Estate X Fund Limited (XFUND) with 283.18 million units traded and Wigton Windfarm Limited Ordinary Shares (WIG) with 59.27 million units traded.
Although appreciating 0.53% year-to-date at the end of August 2022, the JMD weakened month-over-month, depreciating 0.41% against the US Greenback. According to the Bank of Jamaica’s (BOJ) Weighted Average Selling Rate (WASR), the local dollar lost $2.04, to end the month at $151.602. The BOJ did not intervene directly throughout the month, but the interest rate hike in July pre-empted a further slide in the local dollar.
