Established nearly 40 years ago in 1981, the Trinidad and Tobago Stock Exchange (TTSE) grew in the 1980s and 1990s in part through the government advocating for local ownership of the country’s manufacturing firms, banks and conglomerates though pension and mutual funds. Over the past 37 years the TTSE has evolved alongside changing regulatory frameworks and technologies, but continues to be affected by an absence of sufficient liquidity. Like many bourses in the Caribbean, the TTSE is still relatively small and thinly traded, with the ease of access to bank financing discouraging new listings. In recent years capital market development in T&T has been further encumbered by weak overall economic growth and low oil prices. One bright spot for the TTSE, however, is cross-listed Caribbean stocks, while fixed-income assets continue to enjoy strong investor demand.
Listings
Incentivising new listings would help to invigorate the market. As of mid-2018 there were 31 firms listed on the TTSE, with no initial public offerings (IPOs) in either 2016 or 2017. In fact, one manufacturing company, Flavorite Foods, de-listed in 2016. No IPOs had occurred as of August 2018, and no announcements had been made indicating that a firm is seeking to go public during the remainder of the year.
The most recent IPO took place in August 2015, with the listing of Trinidad and Tobago NGL (TTNGL), a subsidiary of the National Gas Company (NGC) of Trinidad and Tobago. Before that, the state-owned First Citizens Bank debuted on the bourse in July 2013. While the government has moved to release additional tranches of equity in First Citizens Bank and TTNGL, the exchange would likely benefit further from new listings through the privatisation of other state-owned entities (SOEs), such as the Water and Sewage Authority of Trinidad and Tobago, the Vehicle Management Corporation of Trinidad and Tobago, or Caribbean Airlines.
Recent Activity
The overall level of trading activity on the TTSE is also fairly stagnant. In 2017 an average of 51 trades were made per day, up from 47 in 2016. Total trades in 2017 amounted to 12,280, up 5.2% from 11,677 the previous year. However, the total volume of shares traded declined from 102.2m in 2016 to 91m in 2017, while the monetary value of trades remained roughly constant, at TT$1.165bn ($172.8m) in 2016 and TT$1.166bn ($172.9m) in 2017.
Both private sector and parastatal companies use the TTSE as a tool to raise capital, although SOEs took centre stage in 2017. That year TT$1.8bn ($267m) was raised through new share offerings by First Citizens Bank and TTNGL, at TT$1bn ($148.3m) and TT$800m ($118.7m), respectively. In May 2017, after the First Citizens Bank transaction was completed, Colm Imbert, minister of finance, told local press, “Given the circumstances, we are quite satisfied to have been able to raise TT$1bn [$148.3m] from this additional public offering.” The transaction was originally forecast to bring in TT$1.5bn ($222.5m). The TTNGL transaction, meanwhile, was also expected to raise TT$1.5bn ($222.5m) when, in late 2016, the government planned to offer the remaining 51% of shares in the company to the public. However, only an additional 26% of shares were floated in June 2017 to join the 49% already on the bourse, resulting in NGC retaining a 25% stake.
The transactions carried out in 2017 represent moderate but important growth for the TTSE. As of December 31, 2017 the exchange’s total market capitalisation was TT$128.3bn ($19bn), up from TT$123.7bn ($18.3bn) in 2016. In the TTSE’s 2017 annual report, Michelle Persad, CEO of the exchange, said that the bourse “experienced another profitable year against the backdrop of a slowly improving domestic economy. Although there was decreased market activity as compared to previous years, we continue to see sustained interest in the securities market as a source of capital.”
Index Performance
Even as T&T continued to confront economic challenges in 2017, the energy sector began to recover. This was evidenced by the energy index posting the strongest gains out of all the TTSE’s sector indices. From the close of 2016 to the close of 2017, the index climbed 26.2%. The banking sector was the next-highest performer, with its index moving up 12.9%. The trading index, meanwhile, recorded a 10.9% rise, while the non-banking finance index increased by 10.6% and the property index grew by 6.5%. Industrial sector activity, however, disappointed. T&T’s manufacturing I and manufacturing II indices fell by 20.5% and 13.5%, respectively, between end-2016 and end-2017.
The Composite Index, meanwhile, which measures the price movement of ordinary shares of companies listed on the first tier of the exchange, expanded by 4.7% in 2017. Share price movements of first-tier firms whose primary jurisdiction is T&T are measured on the All T&T Index. The index fell by 5.7% during the year.
A few individual companies stood out on the TTSE for their share value performances in 2017. JMMB Group, a Caribbean-focused financial services company, posted share price gains of 83.3% to close at TT$1.65 ($0.24) per share. Guarding Holdings, another financial services and insurance company, recorded returns of 34.6% and closed at TT$17.03 ($2.53), while TTNGL posted gains of 26.2% and closed at TT$26.50 ($3.93) per share. TTNGL is expected to continue to attract investor attention as the local energy sector rebounds.
Cross Listed
Another highlight of 2017 was the continued strong performance of the Cross Listed Index. In 2017 the index grew by 38.6% after an impressive 57.9% in 2016. T&T has achieved some degree of capital market integration with Barbados and Jamaica by adopting the same trading platform, but the country has not yet taken full advantage of the opportunity to better connect with other markets in the region.
However, a primary restriction to greater regional trading does not directly pertain to the operations of the bourse, but instead is dictated by broader monetary policy – that is, a lack of direct access to foreign capital. For a resident of T&T to buy financial assets in Jamaica, he or she must change T&T dollars into US dollars and then convert those into Jamaican dollars. These transactions are stymied by a lack of access to US dollars at the official exchange rate, and create a small exchange loss at both steps of the process.
Bonds
Just as the stock market saw low trading activity and no IPOs in 2017, the bond market witnessed an equally low level of movement. Few corporate bonds are represented on the TTSE, and those that are tend to be tightly held, restricting secondary trading. Government bonds, however, enjoy more active trading. In 2017 there were 114 secondary trades made within that market, down from 155 in 2016. Trading was concentrated in the first and fourth quarters of the year, with 46 and 40 transactions, respectively. The total face value of government bonds in 2017 equalled TT$986.1m ($146.3m), while the total traded value amounted to TT$1.1bn ($163.2m). This compares to 2016 figures of TT$1.72bn ($255.1m) for face value and TT$1.75bn ($259.6m) for traded value.
Due to the relatively underdeveloped local bond market, the government largely turns to the banking sector for external financing. In 2017 the government borrowed TT$2bn ($296.6m) from the Andean Development Bank and TT$280m ($41.5m) from the Inter-American Development Bank. In comparison, one bond was listed on the TTSE that year with a face value of TT$1bn ($148.3m) and an eight-year tenor. The bond hit the market in February 2017 carrying a 4.1% coupon rate, with payments due semi-annually on August 14th and February 14th. Meanwhile, two government bonds that had reached maturity were delisted in 2017, a TT$300m ($44.5m) 15-year instrument and a TT$29.5m ($4.4m) facility with a 25-year tenor.
Despite the potential for both government and corporate bonds to emerge as top asset classes for local investors, activity remains relatively limited. At present, most bonds on the TTSE are traded between banks and large institutional funds, leaving few opportunities for individual investors to get involved.
Mutual Funds
Mutual funds, on the other hand, are the primary vehicles for T&T citizens to invest in fixed-income assets and equity instruments, with the amount of capital invested in mutual funds having grown steadily over the last two decades. In 2017 the domestic mutual fund industry grew by 2% and held assets under management of around TT$49bn ($7.3bn).
The most prominent supplier of mutual fund investment opportunities in T&T is the Unit Trust Corporation, a state-operated financial services company. In 2016 the firm’s Calypso Macro Index Fund became the first fund listed on the TTSE. The Calypso Macro Index Fund allocates 15% of units to T&T’s residents, 15% to the National Insurance Board and 25% to companies registered in T&T. Other funds are managed by the country’s major banks and boutique financial institutions.
Although the general long-term trend for mutual funds in T&T is positive, the country’s vehicles saw lower trading activity in 2017. The number of trades within the T&T dollar mutual fund market fell by 8% to 1059, while the value of shares traded fell by 34%. The Calypso Macro Index Fund traded 3655 shares in nine transactions in 2017, with a total value of TT$78,919 ($11,700). The fund witnessed share prices drop by 2.24%. At the same time, the Clico Investment Fund saw 6.37m units traded in 1030 transactions, representing a value of TT$140.8m ($20.9m). The fund’s share price fell by 7.2% over the course of the year. Another fund on the TTSE, the Praetorian Property Mutual Fund, traded 76,685 shares with a value of TT$227,471 ($33,700) in 20 transactions, seeing its share price rise by 10.5%.
Challenges & Solutions
While it is encouraging to see the rise in individual participation through the growth of mutual funds, large local investment funds point to challenges in market development. One issue is the relatively small number of companies listed on the TTSE, which has led many funds to allocate excess capital overseas. Local buyers also tend to hold TTSE-listed assets for years, stifling trading activity and affecting the overall level of liquidity on the exchange. Reinforcing this point, the “Financial Stability Report 2017” by the Central Bank of Trinidad and Tobago states, “Overall, stock and bond markets can be described as very thin with low liquidity levels, which have adverse implications on market efficiency.”
The investment – as well as the business – environment in T&T is further hindered by the fact that local investors do not tend to engage with a wide variety of instruments. Gregory Hill, managing director at ANSA Merchant Bank, a local financial services provider, told OBG, “The preference for plain vanilla debt instruments in the domestic capital market continues to be the Achilles heel for the growth of formal mezzanine and private equity funding, which is critical for new business incubation in a developing economy.”
Improving public understanding of how T&T’s stock exchange and fixed-rate products function is indeed essential for the continued development of the bourse (see analyses). Public education is required for residents to view investing in the TTSE as an opportunity to grow their wealth, thus the Trinidad and Tobago Securities and Exchange Commission (TTSEC) is working to improve financial literacy in the country. In recent years the TTSEC has hosted educational sessions for students and supported initiatives designed to inspire young people to engage with the markets.
On the business side, T&T’s broker community could increase outreach efforts and speak to local companies with IPO potential in order to grow the offering of firms on the exchange. Developing a financial ecosystem where both individuals and firms participate should work to move more funds into the capital market and strengthen the overall health of T&T’s economy.
Regulation
Capital market development is also driven by regulatory initiatives to foster a more fair and transparent investment environment. In 2012 T&T introduced the current Securities Act to replace the Securities Industries Act of 1995, a piece of legislation that created the TTSEC to oversee the capital markets industry. The 1995 act also established the regulatory framework for trading fixed-income instruments and stocks. The current law was designed to provide a more efficient trading system and increase investor protection from systemic risk, but one of its most important changes introduced new guidelines for the repo market for government bonds. The market was largely unregulated before the 2012 law, which required repo transactions involving non-institutional investors to be carried out through the T&T Central Depository, a branch of the TTSE. Having the Central Depository act as a third-party custodian has led to greater oversight and improved the integrity of deals.
Other changes have been made in recent years, such as the TTSE adopting a new trading and surveillance platform along with the exchanges of Jamaica and Barbados in 2016, which has brought additional efficiency and transparency to market activities, and the exchange working with the TTSEC to update guidance for trading execution in 2017. “We look at 2018 as a year to build on the strides made in collaboration with stakeholders for greater trading effectiveness, and ensuring efficient mechanisms for capital market and economic development,” Ray Sumairsingh, chairman of the TTSE, stated in the exchange’s 2017 annual report. “We remain optimistic that in this way we will aid equity and market development, which we see as key to the economic development of T&T.”
Areas to Improve
One area that still needs addressing, however, is mutual fund regulation. In spite of their popularity among individuals and corporate investors that see them as low-risk investments with solid returns, mutual funds operate in an environment that lacks strict rules. The TTSE publishes guidelines for the funds, but the suggestions are not enforced by law.
T&T also faces challenges regarding the transparency of over-the-counter fixed-income product transactions, a situation that has made it difficult for investors to analyse and manage risks. Moving forward, the TTSEC is working to improve its monitoring and mitigation of systemic economic risks, and is further fine-tuning the balance between promoting market transparency and avoiding onerous reporting requirements for financial institutions and listed companies.
In 2013 the TTSEC signed a multilateral memorandum of understanding (MMoU) regarding consultation, cooperation and information exchange with the International Organisation of Securities Commissions (IOSCO), which regulates global securities and futures markets. The MMoU was undertaken to improve T&T’s reputation and grow investor confidence. However, in August 2016 the IOSCO published a report stating that while the TTSEC appears to operate independently from the state, independence is constrained by “near total reliance on government funding”.
Outlook
Although the local exchange experienced rather stagnant activity in 2016 and 2017, there is reason for optimism in the medium term. “Current projections suggest that T&T is emerging from a deep economic recession due in part to growth in the energy sector in late 2017,” Roberta Braga, associate director of the Adrienne Arsht Latin America Centre at the Atlantic Council, a Washington, DC-based think tank, told OBG. “A reversal in deficit trends and a boost to GDP set the stage for the government to turn its attention to fostering non-energy sector growth, including in financial services.”
Economic growth is indeed expected to gather speed in 2018 and 2019, and the TTSE could benefit through higher share prices and more players becoming involved with the exchange. Even if T&T’s road to economic recovery is long, companies with a healthy cash flow have the option to return a higher percentage of their earnings to shareholders. Increasing dividend pay-out ratios would defend the yields earned by investors in a difficult economic environment.
New tax measures may offset incremental economic growth in the near term, however, and affect the earnings of the country’s listed companies. In FY 2018 a change was implemented to the tax regime that subjects companies earning over TT$1m ($148,300) per year to a marginal tax rate of 30%, up from 25%. This increase could deflate the impact of companies on the Composite Index by a few percentage points.
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