Capital markets sentiment in Trinidad and Tobago remains cautious yet optimistic

Trinidad and Tobago’s capital markets have developed against a background of strong energy sector growth, so the current “lower prices for a longer time” outlook for hydrocarbons prices is expected to translate into slower and more modest growth in the near-term. Share prices have remained broadly flat on the Trinidad and Tobago Stock Exchange (TTSE) in 2015, and the outlook for 2016 is that they will remain the same or contract. Yet some optimistic investors believe this is a good time to start taking positions for an eventual recovery. The government is committed to divesting some state-owned assets, which could lead to new initial public offerings (IPOs) and stimulate the market. In the fixed-income segment, increased levels of activity are expected as government bond issuance is set to grow.

Foundation Years

A securities market had existed on an informal basis for a number of years, but it was only in the 1970s and 1980s that the government decisively encouraged its further development. As T&T’s energy revenues increased, government policy favoured raising the share of local equity ownership in what were then largely foreign-controlled companies in banking and manufacturing. The Securities Industry Act of 1981 created the TTSE. Yet the law had a number of shortcomings and was eventually replaced by the Securities Industry Act of 1995, which also created the T&T Securities and Exchange Commission (TTSEC). A further regulatory update came with the passage of the Securities Act 2012. All issuers, underwriters, investment advisers, stockbrokers and dealers must register with the TTSEC, which is in charge of monitoring the market and ensuring orderly and equitable dealings in securities.

At present there are 38 first-tier securities, which are the main and most active stocks listed on the exchange. Among them are six banking companies, three conglomerates – including ANSA McAl and Massy Holdings – nine manufacturing companies, three general trading companies and one firm in the energy sector, the recently floated T&T NGL. International oil companies operating in the country do not list locally, preferring instead to raise capital on major international exchanges. The bulk of trading on the TTSE reflects the largest 15 companies listed, led by Republic Bank Limited (RBL). Total market capitalisation at the end of 2015 was TT$113bn ($17.4bn) which is equivalent to approximately 75% of GDP.

Performance

Stock exchange activity has been muted in recent years. The composite index, which includes all listed companies, rose by 11.39 points, or 0.99%, to end 2015 at 1162.30. In contrast, the All T&T Index, which tracks only Trinbagonian companies, fell by 34.69 points, or 1.75%, to close at 1948.50. The Cross-Listed Index (companies which are also listed elsewhere in the Caribbean) rose by 7.79 points, or 18.67%, to finish the year at 49.51 points.

In 2015 a total of 38 stocks were traded, with 20 recording advances, 13 experiencing declines and five holding steady. The stocks registering the strongest gains included National Flour Mills, National Commercial Bank Jamaica (NCBJ) and Trinidad Cement. The strong rise in NCBJ’s share price was in part prompted by its acquisition of a 29.9% stake in the T&T-based regional insurance and financial services group, Guardian Holdings. Sharp falls were experienced by One Caribbean Media, Praetorian Property Mutual Fund, Massy Holdings and Republic Financial Holdings, RBL’s newly formed holding company.

The mood in early 2016 was cautious among both individual and institutional investors. “From the activity we have been seeing, while the institutions may be a bit worried or concerned, they are looking on the bright side as well, particularly at the opportunity to acquire some positions in securities that they may not have been able to before, because of the level of valuations,” Sarodh Ramkhelawan, investment manager at T&T-based Bourse Securities, told OBG. Yet as far as retail investors were concerned, opinions were more bearish. Some believed further declines could lie ahead and were seeking to exit both equity and mutual fund positions to potentially limit their losses. Others were simply shifting to more defensive positions, for example, by moving from equity-oriented to money market-oriented mutual funds in the expectation of lower, but less risky, returns.

George Sheppard, president of the Securities Dealers Association of T&T and head of Port of Spain-based Sheppard Securities, believes the market still faces a long-term problem caused by excess liquidity. “The challenge we have in our capital markets is a product of our prior success in oil and gas. For the past 15 years we have been generating more wealth than investment opportunities,” he told OBG.

Due to a series of regulatory and foreign currency controls limiting outward-bound investment flows, a lot of that liquidity remained trapped in local currency, creating a situation where too much money was chasing too few securities. This led to a mispricing of assets, with low interest rates, low bond yields and high real estate prices. A loss of confidence in the previous government and the leadership of the Central Bank of T&T (CBTT) exacerbated the situation. Yet with a new administration and CBTT governor in place, Sheppard hopes there would now be a move to sterilise the excess liquidity in the system, with interest rates rising enough to make holding local currency assets attractive again.

The Bellwether

A potential bellwether stock for T&T is Massy, a regional conglomerate with interests in retail, automobile sales, industrial equipment, energy and industrial gases, IT, insurance and telecommunications. The conglomerate’s recent performance can provide some indication of the current state of the corporate private sector and investor perceptions. In the final quarter 2015 – the first quarter of the company’s FY 2015/16 – earnings per share were TT$1.38 ($0.21), down 6.1% on the same period in 2014. Most of this was due to lower revenues from operations in T&T, which accounts for 50% of total turnover. Revenue in the quarter was down 1.6% year-on-year (y-o-y) to TT$3.1bn ($447.4m), on the same quarter in 2014. While revenues from the largest division, integrated retail, rose by 2.4% to TT$2bn ($308m), those in the second-largest division, automotive and industrial equipment, were down 3.9% at TT$626.6m ($96.5m). Energy and industrial gases saw the sharpest fall, down 25.7%, although a number of the smaller divisions did register growth, particularly insurance, which was up by 39.3% y-o-y.

Massy’s growth for 2016 may be affected by a slowing retail sector as well as lower sales of new cars. A number of analysts believe that as consumption levels come under pressure, households will trade down, for example by reducing discretionary spending and by replacing high-cost consumer durables like cars less frequently. New car sales peaked at 19,100 in 2014 before falling for the first time in five years in 2015, when they contracted by 1.6% to 18,800. Consistent with this view of a potentially challenging year in 2016, Massy’s share price fell by 10.5% y-o-y in the first quarter of 2016. This movement downwards may be seen as reflecting a fairly cautious outlook by investors early in the year, even though the stock’s dividend yield was 3.5% and its price to earnings (P/E) ratio, at 9.2x was below that of the market as a whole, which stood at 11.75x.

Looking To Jamaica

While the outlook for investors on the TTSE remains muted – which was triggered by low oil and gas prices – for some, the recent positive performance of the Jamaica Stock Exchange (JSE) is casting a more optimistic light on the TTSE. The JSE was the world’s top performer in 2015, with its main share price index gaining 96.3%. Despite struggling with high debt levels and an IMF-backed austerity programme, the Jamaican economy has been recovering, albeit slowly. Stock prices have been supported by rising profit margins, growing mergers and acquisitions activity, and, following the elections in early 2016, the prospect that the new government may speed up asset sales.

Despite differences in the two economies and their respective capital markets, T&T market players have been looking to Jamaica for inspiration. The JSE’s market capitalisation is around $5.3bn, roughly one-third that of the TTSE. However, Jamaica’s population is more than double the twin-island republic’s, at 2.8m compared to 1.3m. Another key difference is that T&T is a net hydrocarbons exporter, and as such has been hit by the slump in energy prices, while Jamaica, a net importer, benefits from it.

Trinbagonian investors nevertheless identify three trends on the JSE that they would like to see more of at home. These are, first, an increasing number of IPOs; second, successful efforts to attract small and medium-sized enterprises (SMEs) to list; and third, innovation, as shown by the launch in 2015 of the Caribbean’s first online retail share-trading platform, designed to attract expatriate Jamaicans living in the US and the UK. While Jamaica’s junior market is credited with attracting an increasing number of SMEs to list, similar, long-standing efforts by the TTSE have so far failed to take off. Under the terms of an agreement with the Ministry of Finance in the 2011/12 budget, the TTSE created an SME listing category; companies joining it would qualify for a reduced corporate tax rate, to be levied at 10% for an initial five years.

Why this has not yet led to a higher number of public listings is not immediately clear Some analysts suggest that because there are already high levels of tax evasion among smaller companies, the promise of a limited tax break is not a strong enough incentive to list. Others say that T&T’s commercial banks, flush with excess liquidity, have been supplying what should otherwise have been equity capital in the form of loans. According to this argument, conservative, family-controlled SMEs have preferred signing letters of guarantee to secure loans from commercial banks instead of complying with the requirements needed for a public listing.

Cross-Listing

The Jamaican exchange boom has also had an impact on the TTSE due to the number of cross-listed stocks. As a result, the Cross-Listed Index was the strongest performer on the TTSE in 2015, posting double-digit growth over the year. Local brokers explain that cross-listed stocks are attractive for a number of reasons. One is simply that Jamaica-based companies tend to have lower P/E ratios and therefore appear well-positioned for future growth. A second is that, if the T&T dollar continues to depreciate, cross-listed companies with a greater proportion of activity in other Caribbean currencies can be expected to hold up better in real terms. Thirdly, in some specific circumstances, holding both cross-listed stocks and local-currency Jamaican bank accounts can provide an alternate means to acquire foreign currency, which has become scarce in T&T.

Developing The Exchange

Wainwright Iton, the CEO of the TTSEC, told OBG, “We need to deepen our capital markets. We are still struggling to get the listings up. What we really want to see is for the stock exchange to move forward with a flurry of new issues, both debt and equities, that are able to attract the interest of retail investors.” Iton estimates that less than 10% of the local population has invested in stocks and shares, even though a much larger proportion may have bought savings-oriented unit trust accounts. To deepen the market it would be necessary both to increase new listings and IPOs, but also to substantially boost the level of trading on the secondary market. Trading has been extremely thin in recent years, and the average has not exceeded 60 trades a day. Iton recognised that although there is a strong entrepreneurial culture in the country, most of this is informal, and many family-run firms are put off from listing on the TTSE by what is perceived as high governance standards and corporate disclosure requirements. One gradual change that is helping strengthen the national and regional capital markets is the spread of credit rating coverage.

After a difficult beginning 10 years ago, the privately owned, Caribbean-focused ratings agency CariCRIS says it has begun to make headway as it seeks to apply a common credit-rating framework across the region. The ratings agency is currently covering approximately 150 companies, with about half in T&T, one-third in Jamaica, and the rest in Barbados, St Lucia and smaller markets. “We aim to provide more information for investors to allow them to make better-informed decisions and contribute, in that way, to improved integration among capital markets,” Wayne Dass, CEO of CariCRIS, told OBG.

Dass highlighted two important changes in the T&T market. First, under the terms of new bank capital reserve requirements coming into force in 2017 (Basel II, standardised approach) all banks will have to provide capital based on the ratings of entities they lend to. Second, although delayed, new insurance regulations involving the introduction of risk-based capital reserves will, once approved, also drive the demand for credit ratings as insurance companies will be hesitant to invest in non-rated debt securities.

Fixed Income

T&T has a comparatively active fixed-income market. The CBTT issues government bonds – usually with terms of more than five years – through auction, while corporate bonds are often placed privately through investment banks. Both classes of bonds are traded on the secondary market of the TTSE, yet trading volumes are relatively small overall, largely due to the fact that many investors follow a strong buy-and-hold strategy.

Downgrades

In 2015 and early 2016 international ratings agencies responded to the growing financial pressures on the country by reviewing its credit scores. Only two of the main international agencies – Moody’s and Standard & Poor’s (S&P) – provide regular ratings for the sovereign. In March 2015 Moody’s downgraded T&T from “Baa1” to “Baa2” and cut it’s outlook from stable to negative. It said the downgrade was prompted by persistent fiscal deficits and challenging prospects for fiscal reforms, a decline in oil prices as well as limited economic diversification, which would weigh negatively on economic growth prospects. The macroeconomic policy framework was also deemed to be weak and the provision of vital macroeconomic data was judged inadequate. Larry Howai, then the minister of finance, objected to this assessment and complained that the downgrade did not accurately reflect the country’s strong fundamentals. However, the new finance minister, Colm Imbert, said the change in outlook was neither unexpected nor especially surprising and, given the slump in global energy prices, was “not unfair”.

In December 2015 S&P maintained it’s “A/A-1” long- and short-term ratings, but revised the outlook from stable to negative, a decision which it said “reflects an at least one-in-three chance that prolonged low energy prices and potentially poor GDP growth prospects could result in a steadily rising debt burden, leading to a downgrade in the next two years”. S&P acknowledged that the new government had taken initial steps to tackle the fiscal deficit.

In April 2016 Moody’s again downgraded the country’s government bond and issuer ratings to “Baa3” with a negative outlook. Moody’s said its action reflected low oil and gas prices which, despite fiscal consolidation efforts, were expected to “negatively and materially undermine the country’s economic and government’s financial strength at least throughout 2018”. In addition, it warned of the danger that the policy response “will not be as timely and effective as required due to lack of macroeconomic data and weak policy execution capacity”.

Moody’s said that to manage the depreciation of the T&T dollar the CBTT had run down its currency reserves from $11.3bn in 2014 to $9.8bn at the end of 2015, equivalent to a reduction from 12.7 to 11.1 months’ worth of earnings from imports.

There was a potential future risk to public sector finances should key state-owned companies such as Petrotrin, the national oil firm, and National Gas Company require sovereign support. For fixed-income investors the ratings actions had both positive and negative aspects. On the negative side, any downgrade making T&T a less attractive investment destination is an issue of concern. On the positive side, however, as the government seeks to fund a persistently high fiscal deficit, that there will be a significant increase in government bond issues offering an attractive rate of return to investors. Sarodh Ramkhelawan of Bourse Securities believes IPOs and divestments will be limited in the short term, pointing to the fact that while the government may be willing to sell some assets, the timeline to do so was aggressive and it would be facing selling at lower prices into a buyers’ market. “Borrowing is the only arrow left in the government’s quiver in the short term” he told OBG, noting that the authorities had already raised their borrowing limits. Sheppard at Sheppard Securities echoed the positive implications for capital markets. “What will help is the obvious deepening that is going to occur because the government is going to need to borrow a lot of money,” he told OBG.

“Previously, the government had been paying back and capital markets had been getting thinner and thinner. Now the government and the CBTT will both be net issuers,” Sarodh Ramkhelawan added. One implication is that fixed income might play a more dynamic role than equities over the next year or so.

Outlook

T&T’s economy has some difficult years ahead of it because of the necessary macroeconomic adjustment to low hydrocarbons prices, and this process will likely affect the outlook for capital markets. Sarodh Ramkhelawan projected a 3% to 5% fall in the shares index for 2016 as a whole, with the weakness of the market in early 2016 suggesting the overall performance for the coming year might be closer to a 5% than a 3% decline. In his view, however, the significant turning point would only come when investor confidence in the new government’s handling of the current crisis begins to gather strength. Although the authorities have recognised the magnitude of the current crisis and begun taking action, the desired results may take some time to materialise.