Gregory Hill, Managing Director, ANSA Merchant Bank: Viewpoint

Viewpoint: Gregory Hill

Even though it was established almost 40 years ago, the Trinidad and Tobago Stock Exchange (TTSE) has characteristics seen in younger, less developed stock markets. However, the TTSE is currently undergoing a transformation and the authorities are working to address several fundamental challenges, including illiquidity, subdued trading activity and a shortage of publicly listed companies.

A dearth of liquidity in T&T’s equity markets is reflected in the sluggish movements on the stock exchange. As is common in illiquid markets, there is a lack of dynamism on the TTSE that has resulted in low levels of daily trading activity. Trading activity on the first-tier market decreased by 14.5% in 2018, with 72.3m shares traded, down from the 84.6m shares traded the previous year.

A liquid market is generally associated with less risk. However, in markets without liquidity, a small number of traded shares can cause a significant swing in price. This distorts the inherent fair pricing mechanisms necessary to an exchange.

An illiquid stock exchange is not attractive to investors, as their investments may be trapped and it may be difficult to leave a stagnant market. Investors are also not able to capitalise on a stock’s performance without quick access to shares on the exchange. As such, the rebalancing of the local equity portfolio takes time, which also stymies portfolio performance in the interim.

Domestic stocks have underperformed those of companies based outside of T&T. This can be seen when comparing domestically listed stocks against those that are cross-listed. In FY 2018/19 the All T&T Index performed poorly against the Cross Listed Index. It also was outperformed by the T&T Composite Index, which is made up of both local and international corporate shares.

As of the end of the third quarter of 2019 the T&T Composite Index had returns of 7.5%, whereas the All T&T Index had returns of 2.4% and the Cross Listed Index had returns of 17.7%.

Despite their success, domestic pension plans cannot tap into cross-listed investments due to regulatory constraints. As such, a stock is considered a foreign investment, and only 20% of a portfolio can be allocated towards this type of vehicle.

The Jamaica Stock Exchange (JSE) was labelled the world’s best-performing stock market by both Bloomberg and the Financial Times in 2019. It surpassed the JMD$2trn ($15bn) mark in September 2019, doubling in value in fewer than two years.

There are 45 firms listed on the main Jamaican exchange, versus 26 on the first tier of the TTSE. Despite having a smaller market capitalisation than that of the TTSE, the Jamaican bourse has grown at a faster rate, capturing more listings and activity.

The ease of access to loans disincentivises the use of the stock market as a means for companies to raise capital. This has been reflected in the low number of initial public offerings (IPOs) in recent years. The most recent IPO in T&T occurred on the small and medium-sized enterprise (SME) exchange in October 2019, with Endeavour Holdings launching a property IPO. The year before, CinemaONE Gemstone became the first company to list on the SME exchange, offering a 38% stake in its business.

On the main exchange, the most recent IPO occurred in 2015, with the listing of a subsidiary of the National Gas Company of T&T, the holding company of TTNGL. Before that was the listing of state-owned First Citizens Bank in 2013.

By comparison, the JSE had five IPOs in its main market in 2019 alone, and several Jamaican companies have announced their intention to go public in the coming years. Stock exchanges across the region can look to the JSE as an example to emulate, as the market has effectively tapped IPOs secondary offerings to inject momentum into the capital markets.