Monday, February 19, 2018

Think Local


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After the height of the sub-prime mortgage market meltdown in 2008/09, investors' psychological instability and lack of confidence continue to be cancerous to the global financial markets. Investors remain baffled by financial sector failure across Europe coupled with high unemployment in the US and slowing economic growth in China. The last eight months have seen the now prevalent Facebook bear, banking behemoths posting equally huge losses and austerity measures across Europe. These events continue to heighten doubts in the minds of financial practitioners while injecting immense fear into those outside of the sector. Many questions have been raised; however, solutions continue to counteract solutions, and in most cases, questions have been left unanswered.

Locally we have not escaped the financial Titanic. The local economy continues to experience high levels of liquidity which is keeping interest rates low. The Central Bank of Trinidad and Tobago, in a valiant and strategic attempt to encourage and increase economic activity, recently reduced the Repo Rate by 25bps from 3.00% to 2.75%. Subsequently, banks have reduced their prime lending rate by 25bps form 7.75% to 7.50% in order to spur credit demand, which has been slow to recover. The economy continues to operate on the mixed results of the energy sector coupled with the sluggish non-energy sector. Due to the economic slowdown, consumers have now begun to closely monitor their spending and borrowing patterns. Consumers are zipping their pockets, increasing their savings and throwing a sharp eye on credit promotions. This truly illustrates that economic patterns have changed and that the country is, by no means, immune from the global events.

In light of our current environment, which is plagued by low interest rates and high liquidity, investors continue to search for the right place for their cash. Some have opted for deposit accounts while others have started investing in alternatives, such as stocks, bonds, mutual funds, repurchase agreements and other financial products. From an investment perspective, it is critical to understand the difference between savings and investments. Savings is defined as the excess of disposable income after costs and expenses are subtracted. Saving accounts usually draw very low interest rates leading to low return. An investment is defined as an asset purchased with the hope that it will generate future income. Both differ in terms of the risks and returns associated. Based on the context of the both local and global economic occurrences, individuals have opted for savings, instead of investments, largely because of greater risk aversion; however, the returns are minimal. Notwithstanding, amid the global economic uncertainty, returns on most investments have lost value due to accommodative monetary policies, which lowered benchmark rates.

Amidst the economic uncertainty and the disappointing performance of world financial markets, the Trinidad and Tobago Stock Exchange (TTSE) emerged the fifth (5th) best performing market globally. . The TTSE comprises of the Composite Index, which measures the performance of the entire market, the All Trinidad and Tobago (AT&T) Index, which includes companies based in Trinidad and Tobago and the Cross Listed Index, which comprises regional/international companies. However, the TTSE continues to be challenged by illiquidity and little activity. While the local stock market activity and volume cannot be compared to that of the New York and London Exchanges, the market has performed well over the last 23 months. For the year thus far, similar performance is noted and is supported by the following analysis:

The analysis in Table 1 shows volume of shares traded on the Composite Index and The All T&T Index

Based on Table 1, the volume of shares traded continues to decrease on a yearly basis reflective of overall behavior and stock market activity. While volumes continue to decrease, a better picture is painted from the point of return.

Table 2 shows the superior performance of the Composite Index for the year thus far. In light of the economic stagnation, the Composite Index, specifically, investment directly in the AT&T Index is indeed a local home for your cash. With this performance recorded, the fallacy of a dormant stock market is now completely erased. Table 3 shows the performance of the AT&T Index when compared against Stock Market titans such as the New York Stock Exchange.

Based on Table 3, the AT&T Index has outperformed all of the comparative world indices except the DAX (German Stock Exchange). Despite the declining volumes and activity, the market continues produce returns in line with inflation.

Local investing is always encouraged. In the financial markets, knowledge is critical. While the sophistication of foreign markets coupled with the unending span of information via the worldwide web entices most individuals, starting at home can create the foundation for future building. All investors should practice a form of localism. If more bullish opinions and optimism were held with regard to the local market, its development would hasten. In addition, the Government of the Republic of Trinidad and Tobago has stated in its 2012/13 Fiscal Package presentation the much anticipated Initial Public Offerings of First Citizens and the Trinidad and Tobago Mortgage Bank.

In concluding, always remember that historically, inflation is generally expected to increase in line with economic growth, which means that an investment made today is for tomorrow. Bearing in mind the performance of our local market, ease of access and potential future, all investors should firstly 'Think Local'

All information contained in this article has been obtained from sources that First Citizens Investment Services believes to be accurate and reliable. All opinions and estimates constitute the Author's judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by First Citizens Investment Services in any form whatsoever.

First Citizens Investment Services and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer or a solicitation to buy or sell.