Viewpoint: Gregory N Hill
The development of capital markets in nascent frontier economies is a slow process. At the heart of it, market transactions require a degree of trust, which prevents adoption from taking root quickly. Regulations need to be transparent, concise and well understood, while tax structures have to promote risk-taking and entrepreneurship. Meeting these requirements means that market participants have to work towards a common goal; a slow process at the best of times. Therefore, it is not surprising that trading in Tier-1 stock markets has not measurably increased since 2013, while secondary trading of government bonds has declined.
Young families, recent graduates and thriving entrepreneurs alike are untapped investor groups with savings currently sitting dormant in money market funds and chequeing accounts. The recent $4bn National Investment Fund bond deal, which was 1.8 times oversubscribed, and the $719m in investment from 7346 individual investors, is testament to the need for broader education in asset allocation methodologies. The public should also be equipped with electronic trading platforms where fair value can be sought by institutional and individual investors.
Foreign exchange (forex) shortages have also had a telling effect on capital markets. Exports are dominated by the energy sector, and due to the decline in commodity prices, the nation’s current account has turned negative after years of being in the green. The manufacturing, retail, trade and distribution sectors all rely heavily on forex to fund their operations. Due to this imbalance, the Central Bank of Trinidad and Tobago (CBTT) has instituted a policy that prioritises forex intervention funds to be utilised for manufacturing. A sizeable portion of payables in most companies, however, is denominated in US dollars. This has created an opportunity for corporates and investors to engage in cross-currency debt transactions. Other investors have also been incentivised to pay more attention to the local stock market rather than global markets. Due to the liquidity in the market some asset price dislocations may have occurred, especially with companies paying high dividends. The overall impact has been positive for the market, however, foreign direct investment has suffered due to currency uncertainty.
An overvalued currency, combined with uncertainty about policy decisions, has created an atmosphere where some foreign investors have sat on the sideline waiting for the depreciation cycle to be completed before investing. While the CBTT’s monetary policy in recent years has been understandable, negative yield differentials between short-term US and local Treasury bills have encouraged investors to look elsewhere for more attractive returns and increased the demand for hard currencies. The appetite for local investments, nevertheless, can be stimulated. While there will always be a higher risk premium for emerging markets, the premium applied to information asymmetry can be reduced. Proper handling and frequent information flows from bond issuers and public companies would go a long way in safeguarding investor comfort. In other words, investors prefer to invest in opportunities they are familiar with, given the playing field remains level.
Ultimately, the key driver of local capital markets remains the energy sector and the rejuvenation in exploration and production activity since 2016. Most of the major operators have reported new finds, with global firms BP, BHP and Royal Dutch Shell leading the way. However, the shorter-term energy outlook remains uncertain. Although gas production has increased 10% on 2017, averaging 3.7m standard cu feet per day (scfd), levels thus far in 2018 are still 15% below 2011. We do not expect to see the big bull market of 2000 to 2005, when gas production rose from 1m scfd to 3.5m scfd, and the All T&T Index produced annualised returns over 20%, until the gas curtailment issue is addressed. In the fixed-income space, we encourage borrowers to pursue financing deals with us. No one can time the market, but the low interest rate environment may not persist.
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