Liquidity remains a challenge in Trinidad and Tobago's captial markets

Established in October 1981, the Trinidad and Tobago Stock Exchange (TTSE) played a key role in socialising the benefits of economic growth that followed the discovery of hydrocarbons reserves in the 1960s.

During the 1980s and 1990s the government encouraged local equity ownership of banks, conglomerates and manufacturing firms that profited from the oil boom, allowing Trinbagonians to share in the rewards in the form of investments, pensions and mutual funds.

In the following 35 years the TTSE has grown, updated its regulatory systems and adapted new technologies, but it has also faced challenges typical to small bourses. Trading volumes and liquidity remain low, and with private firms finding easy access to bank finance there are few incentives for new listings. In recent years declining economic growth on the back of weak oil prices has fed through into local stock valuations, but other Caribbean stocks cross listed on the TTSE have performed well and the fixed-income segment is continuing to see strong demand from investors.

History

The 1995 Securities Industries Act established regulations for trading of equities and fixed-income instruments, and created the T&T Securities and Exchange Commission (TTSEC), the regulatory body overseeing the capital markets industry. In 2012 a new securities act replaced the 1995 law, with the intention of providing a more efficient trading system, and increasing investor protection and insulation from systemic risk. In 2016 there were 38 first-tier securities listed on the exchange, with 38 broker-dealers and 16 investment advisors registered with the TTSEC.

For the second year running the performance of the TTSE Composite Index, which tracks all stocks listed on the exchange, was kept in the black by the spectacular performance of Caribbean firms cross listed in T&T. Cross-listed stocks rose 56% in 2016, allowing the Composite Index to post a gain of 3.7%. Barbados-based FirstCaribbean International Bank’s share price climbed nearly 30% over the course of 2016. According to TTSE’s 2016 annual report, the bank’s market capitalisation of TT$13.41bn ($2bn), second only to Republic Bank on the TTSE, was a major contributor to the growth of the TTSE Composite Index, but the performance of Jamaican companies also played a key role. In 2015 the Jamaica Stock Exchange (JSE) was the world’s top performer, boasting a 96% rise on the back of lower imported fuel costs, rising margins, and increased mergers and new listings. In 2016 the JSE continued to grow rapidly, rising 27.6%, and a number of its buoyant stocks are listed on the TTSE and posted strong gains. For example, the share price of the National Commercial Bank of Jamaica rose 43% and conglomerate GraceKennedy by 98%.

Strip away these Caribbean bulls, however, and the performance of the All T&T Index, which only tracks the performance of Trinbagonian companies, showed a 6% decline in 2016. The major banks posted modest losses, with Republic Bank falling 3.1%, Scotiabank 5.1% and First Citizens Bank down 1.3%. The conglomerates had mixed fortunes, with Ansa McAl rallying in December 2016 to fall just 0.2% over the year, while Massy Holdings dropped 15.4%. “The performance of Trinbagonian stocks on the TTSE was roughly in line with what we expected at the beginning of 2016,” Sarodh Ramkhelawan, manager of investments at local broker-dealer Bourse Securities, told OBG. “A marked slowdown in economic activity, from gas production to the construction sector, fed into the stock market, and the announcement that corporate tax on profits would rise from 25% to 30% naturally impacted valuations.”

Friendly Bankers 

Trinbagonian equity investors could be forgiven for envying the good fortune of their Jamaican neighbours, but it would be imprudent to draw too many comparisons from the JSE or expect it to show the path forward for the TTSE. The divergence in performance of the two bourses is an indication of the very different economic models employed by T&T and Jamaica. First, Jamaica’s energy importing economy has benefitted from the fall in the oil price, while T&T’s has faltered. Of greater relevance to the stock market, however, is the disparity in availability of bank credit. In Jamaica, bank loans are difficult to access and charge prohibitively high interest rates that range from 15% to 20%, pushing entrepreneurs to tap equity financing.

In T&T, the opposite is true. In the first 10 months of 2016 commercial banks’ excess reserves reached TT$4bn ($597.7m), up from TT$3.5bn ($523m) in the same period the previous year, according to central bank figures, meaning cashed-up banks have a surfeit of capital ready to lend to businesses at rates of around 5%. Trinbagonian companies, therefore, can fund growth without going public and exposing themselves to increased reporting requirements or opening their firms to outsiders. “Less than 10% of the country’s major family-held businesses are listed on the TTSE,” André Joseph, senior manager of ratings at local agency Caribbean Information & Credit Rating Services ( CariCRIS), told OBG. “They have easy access to bank finance and there is a general unwillingness to release control of their firms by going public.”

This trend applies equally to small players. In 2012 the TTSE introduced an initiative to encourage small and medium-sized enterprises to list on the exchange, sweetening the deal with a reduced corporate tax of 10%. Only one firm listed under the conditions and withdrew shortly afterwards.

Hold On

Excess liquidity has become the central feature of T&T’s capital markets segment, and its effects are manifold. Following years of capital accumulation during the oil price boom, there is simply too much cash chasing too few local investment opportunities.

One result has been the rapid growth of the repo market for T&T government bonds, which the TTSEC has regulated since 2012, and is currently seeking to measure through increased reporting requirements (see analysis). Local asset management firms also routinely invest 60-80% of their portfolios overseas. “There have been complaints of capital flight from T&T,” George Sheppard, president of the Securities Dealers Association of T&T and CEO of Port of Spain-based Sheppard Securities, told OBG. “There is nothing hidden about it, however, and it is not because of a lack of confidence in the local economy. People invest overseas because there are limited opportunities to put capital to productive use locally.”

This shortage means that holders of local stocks and bonds tend to buy and hold stocks for years, impacting liquidity. In an average week trading volumes are around TT$30m ($4.5m). “Volumes have been low and they continue to decline,” Sheppard told OBG. “Activity picks up when the government sells a tranche of a public company, but this is not a sustainable situation.”

The lack of activity meant the TTSE was faced with the need to raise its fees in 2016. “It is a catch-22 situation,” Ramcharan Kalicharan, managing director of local brokerage firm KSBM Asset Management, told OBG. “The exchange is doing less business so it raises its fees, but then investors become less likely to sell because a round trip of buying and selling a security costs around 3.5%, and this in turn drives liquidity down.

New Listings

In such an environment, the primary hope for increased activity and liquidity on the TTSE lies in new listings. The country’s last major initial public offerings (IPOs) were in July 2013, when the government listed 19.3% of state-owned First Citizens Bank, and in September 2015, with a 19.1% stake in Phoenix Park Gas Compressors, a government-owned gas processing plant. “An important goal of the government’s divestment programme should be to offer wealth generation to as wide a group as possible,” Joseph told OBG. “One of the best ways is to divest some of its assets to institutional investors such as the Unit Trust Corporation and to individual investors via the TTSE.”

In October 2015 minister of finance Colm Imbert stated that the government needed to raise up to $TT13.4bn ($2bn) through IPOs, divestments and extraordinary dividends, but in 2016 there were no new listings and one delisting, that of local manufacturer Flavorite Foods. Of the existing state assets that could be potentially be opened up to a degree of privatisation are release of further tranches of equity in First Citizens Bank and the National Gas Company of T&T (NGL). In addition, state utility provider the Water and Sewage Authority of T&T, the Vehicle Management Corporation of T&T and Caribbean Airlines are often suggested in local media as privatisation targets.

Tech

Future listings will take place on the bourse’s new trading platform. In March 2016 the TTSE, along with respective stock exchanges in Jamaica and Barbados, announced that it would replace its existing partnership with Global Vision to move over to a new we-based trading platform offered by South African firm Securities Trading Technology. The new system, which went on-line in February 2017, allows multiple asset classes to be traded from a single portal, and for the easy addition of new products and services.

The move prompted speculation that momentum was gathering towards the integration of the bourses into a Caribbean exchange, an idea that was first proposed by CARICOM governments in 1989. However, the different trading regulations in each market, combined with the difficulty in currency conversion between the exchanges, means that such a project is unfeasible at present. C. Wainwright Iton, former CEO of TTSEC, told OBG, “While a single Caribbean stock exchange may be preferable to cross listing, given current realities and a lack of unified political will across the region towards this goal, cross listing is the only practical way forward.”

Nevertheless, a joint exchange is something the Caribbean’s traders should aspire towards, according to Ramkhelawan. He told OBG, “At the moment, there are arbitrage opportunities for trading cross-listed stocks. A joint bourse would improve overall market efficiency and be a net positive for the region.”

Fond of Bonds

While there were no new stock listings in 2016, the year did see two sovereign bonds and one major corporate bond issued. In July 2016 the government of T&T tapped the international markets for the first time since 2013, issuing a $1bn, 10-year eurobond arranged by Deutsche Bank and T&T’s First Citizens Bank. Over 250 international investors put forward orders of over $3.5bn, allowing the coupon rate to be reduced from 4.625% to 4.5%. This was only slightly higher than the 4.375% set by the $550m 2013 bond. An accompanying statement from the Ministry of Finance said the issue was “reflective of the confidence of investors in the government’s management of the economy and the medium-term fiscal and monetary outlook. The 4.5% interest cost of the bond compares very favourably with recent government bond issues.”

In June 2016 Republic Bank was the sole underwriter for a local currency bond valued a TT$2bn ($298.8m). The 14-year bond, again with an interest rate of 4.5%, was the biggest commitment in the local bank’s history. The over-subscription of the dollar bond demonstrates sustained foreign investor confidence following investor roadshows in Los Angeles, London and New York that preceded the offering.

The necessity of foreign debt finance was questioned by some, however, given excess liquidity at home and the currency risk implicit in a strengthening dollar in late 2016. “I do not know why the government would go to the market in US dollars when there is so much TT dollar liquidity,” Sheppard told OBG. “Forecasts suggest that the 10-year paper will be more expensive to pay back as the currency devalues.”

However, by April 2017 the US dollar was weakening, alleviating currency concerns. Joseph said the issue represented a good deal for investors. “Following two or three years of little action on the fixed-income side, there was appetite for the bond,” he told OBG. “The government was also unclear on how the cash raised will be put to work. The market would appreciate information on how it will be spent to restart growth, build infrastructure and diversify the economy.”

Top Of The Class

Credit rating agency Moody’s gave the US dollar bond a “Baa3” rating with a negative outlook, one level above sub-investment grade. The agency highlighted the country’s slow growth and high exposure to oil shocks, but noted that T&T also had an affordable debt burden, adequate foreign exchange reserves and a stabilisation fund equivalent to 22% of GDP. Despite the difficult economic conditions over the previous two years, T&T sovereign debt remains the most creditworthy in the Caribbean, according to CariCRIS, which focuses on regional sovereign and corporate debt ratings. “In June 2016 we downgraded T&T sovereign debt from “CariAAA-” to “Cari AA+”,” Joseph told OBG. “We felt we needed to signal recent weakness to the market, but even at the current rate, T&T debt remains the best in the region.”

A ratings upgrade, like so much in the T&T economy, will depend on oil sector performance. “We cannot control energy prices, but we can create the conditions for improved oil and gas production,” Stefan Fortune, manager at CariCRIS, told OBG. “We need fiscal incentives to stimulate the upstream industry while at the same time tackling the fiscal situation.”

Corporate

Corporate bonds are relatively common among the country’s major firms, but are also tightly held with very little secondary trading. In December 2016 the state-owned Telecommunications Company of T&T came to market with a TT$1.5bn ($224.1m) bond to go towards financing a TT$3.8bn ($567.8m) investment programme.

The bond was underwritten by Republic Bank and received a “good” rating from CariCRIS. It has yet to be seen whether the bank will release a portion of the bond to the secondary market, but most corporate bonds are held even tighter than shares. “Most bonds are issued as a private placement, with banks and funds leaving little room for individual investors,” Adrian Manmohan, head of West Indies Stockbrokers Limited (WISE), told OBG.

Feeling Is Mutual

One of the primary ways Trinbagonians can invest in fixed income and equity securities is through investing in mutual funds. The volume of T&T capital in collective investment schemes (CIS), particularly mutual funds, has increased steadily over the last 16 years. In 2000 funds under management totalled a little over TT$6bn ($896.5m), and by October 2016 that reached TT$48bn ($7.2bn), according to TTSEC data. “Mutual funds have become the savings scheme of choice for the man in the street in T&T,” Manmohan told OBG. “Businesses also park their excess capital in mutual funds, which offer risk-averse investors a secure investment with good returns.”

Despite their popularity, mutual funds remain largely unregulated, a situation Iton is looking to address in the coming years. He told OBG, “While the TTSE has guidelines for CIS, they do not carry the force of law. A draft framework of by-laws needs to be presented to parliament in order to move this forward.”

State-run financial services company Unit Trust Corporation is the largest supplier of mutual fund options in T&T, with an estimated TT$24bn ($3.6bn) under management. The group’s Calypso Macro Index Fund allocates 15% of units to individuals who are residents of T&T, 30% to registered pension funds, 15% to credit unions and registered mutual funds, 15% to the National Insurance Board of T&T and 25% to companies registered in T&T. In January 2016 it became the first mutual fund to list on the TTSE.

The next-largest funds belong to the country’s major banks, with smaller boutique firms offering alternative products, according to Kalicharan. “Uptake in mutual funds is driven by banks which piggyback their funds to depositors,” he told OBG. “In recent years a number of smaller firms have established themselves in the market based on close relationships with high-net-worth clients. They differentiate themselves from the pack in terms of performance, service and innovation, and there is scope for growth in this segment.”

Investor Education

Improving public understanding of how the exchange and fixed-rate products work is key to further development of capital markets. “Heightening activity on the TTSE will require greater efforts to educate the market,” Iton told OBG. “There is potential for the broker community to work more closely with companies with IPO potential to bring them to the market, underpinned by a nurturing relationship.”

The TTSEC is keen to improve financial literacy at a much younger age, however. In September 2016 it hosted an investor education session for over 140 students and teachers in the Central Bank Auditorium. In August 2016, in partnership with local telecoms provider Blink bmobile, the TTSEC also awarded prizes to winners of the Young Investors, Creative Expressions competition, which challenged young people to create videos focused on the topic of investor education.

Outlook

Following the 6% fall of Trinbagonian stocks in 2016, fund managers agreed that 2017 would bring further but more modest losses. “There are some reasons for optimism,” Ramkhelawan told OBG. “Initiatives to increase hydrocarbons production are under way and higher oil prices as a result of OPEC cuts should boost government tax revenues in 2017. Nevertheless, I expect the TTSE, excluding the cross-listed stocks, to shrink by around 4% over the coming year.”

Of particular concern is the banking sector. “As the economy slowed we saw a sharp increase in bad loans in 2016,” Manmohan told OBG. The continued shortage of foreign currency could also take its toll on major banks. “Something has to give,” said Sheppard. “If the government converts the $1.5bn into TT dollars to cover expenses, liquidity will spike even higher. At some stage the central bank will have to address this issue, either through the blunt instrument of increased reserve requirements, or, preferably, open market operations. With little scope to increase the lending rate, banks’ margins will come under pressure.”

However, T&T manufacturers and exporters that incorporate local materials and have a strong brand could benefit from a weaker TT dollar in 2017. “Angostura is an exciting stock,” Sheppard told OBG. “They have a strong global presence, but in a depreciating exchange rate environment they can also outsell the importers and distributors of foreign spirits in T&T.” With the national buy-and-hold mentality enduring, the expected listing of further tranches of First Citizens Bank and NGL would bring some welcome trading activity in 2017. Nevertheless, the likelihood of continued high T&T dollar liquidity remains the central challenge to developing deeper and more liquid capital markets.