The Bloomberg Business headline reads, “It’s Jammin’: Jamaica’s Tiny Stock Market Conquers World in 2015.” The news article explained that the Jamaica Stock Exchange (JSE) was the best performing stock exchange in 2015, with its index’s more than 80% increase outpacing all the other world indexes (for example, Dow Jones Industrial Average: -1%, and Euro Stoxx 50: -6% in dollar terms).
Bloomberg cites foreign acquisitions, stronger investor safeguards, and a rebounding economy as critical factors that explain the surge of JSE’s index, but also highlights an innovation launched by the JSE: an online trading platform that allows the Jamaican diaspora and small retail investors to invest in companies in their home country.
Another major factor that pushed the JSE index to the top is an ambitious and innovative endeavor in financing for small and medium-sized businesses: the JSE’s Junior Market, launched in 2009. A junior market is a type of stock exchange specifically designed for the needs of smaller enterprises. These exchanges are based on the premise that a simplified regulatory framework, coupled with streamlined requirements, allow these businesses to access growth capital that they otherwise couldn’t obtain, because they are unable to comply with all the criteria for listing in traditional main markets.
The best known junior market is the London Stock Exchange’s AIM (formerly the Alternative Investment Market), which was started in 1995. In the two decades since, several similar initiatives have sprouted around the world. In developed countries, there is Japan Exchange Group’s TOKYO PRO Market. In emerging countries, there are Costa Rica’s MAPA (Mercado Alternativo para Acciones) at its Bolsa Nacional de Valores (BNV), and Peru’s MAV (Mercado Alternativo de Valores) at Bolsa de Valores de Lima (BVL).
These relatively new initiatives are yet to prove their viability and effectiveness. But their premise is valid: creating alternatives to respond to the needs of dynamic small businesses that are seeking resources to finance expansion or investment projects.
Entrepreneurship as a possible way out of recession.
Technical traders often look for a confluence of events when making an investment decision. Chart patterns, with moving average indicators; the latest economic trends; and market-moving news releases are all considered for optimal market entry. The simple strategy that underlies the complexity of this investment decision is to enter the market early, while the trend is still in its formative stages, and thus increase the opportunity to maximize the return on investment.
What confluence of events inspired the JSE to further promote the use of its Junior Market as the best financing option for small businesses? The same as for traders: when the trend was in its early stages. In 2014, the country was just emerging from a recession with early signs of stabilization; however, a path to sustainable economic growth was not yet clear. Jamaica started its economic reform program with the International Monetary Fund, the World Bank Group, and the IDB Group. The country saw entrepreneurship as a possible way out of the malaise; however, constrained by lack of access to finance, local small businesses were unable to compete in the global marketplace and therefore had limited potential for growth.
At the same time, the IDB Group had started a number of assistance projects designed to ease access to commercial credit: establishing a framework for a credit bureau, helping to establish a framework for secured transactions, and supporting a registry for notices of security interests in movable property. These projects included some technical assistance to the JSE by the IDB Group’s Multilateral Investment Fund, including help in launching the online trading platform and in identifying small businesses that were qualified to list on the Junior Market.
The JSE’s hypothesis at that time was that high-impact entrepreneurs, given access to appropriate financing options, would invest in the expansion of their business, resulting in more jobs and higher economic growth.
160% jump in Junior Market index
Nowadays, 25 companies are listed on the JSE’s Junior Market, a significant number in a relatively tiny stock market in a small developing economy. Furthermore, the overall growth in the JSE index mentioned at the beginning of this post was supported by an astronomical 160% growth in the Junior Market index last year.
True to the JSE’s hypothesis, almost all companies listed on the Junior Market used the capital raised to make significant investments in expanding their operations, which resulted in increased sales, profits, and net assets—in some cases by almost 300%. Five of the listed companies are now positioned for regional expansion. While the employment figures are yet to be tabulated, some companies reported employment increased of approximately 40%.
One example is Lasco Affiliated Companies, a diversified enterprise that manufactures and distributes consumer products and offers financing to microentrepreneurs. It was listed on the Junior Market in 2010 and recorded a pre-tax profit of 14.96 million Jamaican dollars that year. By 2015, that figure had risen to 191.07 million Jamaican dollars—a whopping 1,273% increase, according to Chief Executive Officer and Executive Chairman Lascelles Chin.
An interesting trend is that 61% of the companies listed in the Junior Market are in the manufacturing sector, which has been generally declining for decades. Although it’s too early to extrapolate any correlation with economic growth, the convergence is uncanny; the Statistical Institute of Jamaica reported that the economy grew by 1.5% in the third quarter of 2015, because of increases in both the goods-producing industries and the services industries of 3.9% and 0.7%, respectively.
From the Multilateral Investment Fund Trends blog