months into 2005 and the investment landscape is no clearer
than it was at the start of the year. At the beginning of
2005, most local analysts had predicted annual returns in
the range of 15 to 20 per cent in T&T, while in the US
the market was expected to return in the region of seven to
11 per cent.
The T&T Composite Index started the year at 1,074.63 and
so far is up ten per cent to 1,188.08. Thats a fairly
healthy return in less than four months. However if the market
were to continue at this rate we would be well ahead of most
analysts expectations by the end of the year.
On the other hand, the Dow Jones, the S&P and the Nasdaq
are all down for the year giving up all of the gains from
the early part of 2005.
The same pattern is emerging in Jamaica where after strong
gains in January (the All Jamaica Index was up 14.55 per cent)
the market has turned to reflect a year to date decline of
9.34 per cent.
There are a number of factors at play here, some of them are
global in that they transcend the different markets albeit
affecting some markets differently to others, and some are
specific to the respective markets just discussed.
Before getting into these factors, I would like to make a
point regarding risk and return.
Ignoring short-term volatility
It is important to grasp the concept that, generally speaking,
investing in the stock markets carries more risk than investing
in a mutual fund or placing your monies in a bank deposit.
The risk comes from the fact that share prices rise and fall
There may be a distinct upward trend in a stock, but within
the period of the trend there will be instances when the share
price may rise excessively and then correct itself.
Take the example of Trinidad Cement Ltd (TCL). The companys
share price began to appreciate during the last quarter of
2004. This trend continued into 2005 where the share moved
from $8.05 to $13 before falling to $11.90 and then rebounding
to its current position of $12.03. (see table on Page 17)
While the example of TCL covers a span of days and weeks,
such volatility can be spread out over months even years.
It is because of this volatility that investors are often
advised to only put money that you would not need for the
next three to five years into stocks.
This is an important point to note since while the local market
is currently quite buoyant, a short term correction is not
beyond the realm of possibility.
This is exactly what has happened in Jamaica so far this year
and with the advent of electronic trading in T&T the market
is expected to react a lot quicker than in the past.
Once you allocate long-term funds to seek out long-term returns,
the issue of volatility goes away and the only real issue
becomes that of the economic risk associated with the investment.
When I speak of economic risk I am referring to how well a
company manages and reacts to its environment in order to
generate returns to its shareholders.
If, therefore, you select stocks based in a haphazard manner
without consideration as to the performance of the company,
its standing within the sector that it operates and the markets
or geographical location(s) that it operates from, then volatility
could very well translate into absolute losses where no matter
how long you wait there is no recovery.
This is why there were many instances in the past where I
have advocated that investors study the annual report of companies
prior to investing as well as keep updated on the changing
conditions of its operating environment.
This brings us right back to the comments made at the beginning
of this article where the changing and uncertain economic
environment poses a challenge for investment decision making.
On a global scale many at the start of 2005 expected that
China would experience a slow down in economic growth this
However first quarter results are now available which suggest
that this emerging global powerhouse grew its economy by approximately
nine per cent over the first three months of the year. This
level of growth maintained the global demand for commodities
and the expectation is that it will continue to put a strain
on the availability of commodity items, oil being just one
Increased commodity prices tend to have an inflationary effect
on an economy possibly leading to a tighter monetary stance
on the part of the regulators. However in much of the world,
the US and Europe included, economic growth is still fairly
fragile meaning that if the policy becomes too restrictive
then the economy might stagnate or in a worse case go into
Finding the right balance is the key.
The rate and frequency of interest rate adjustments must be
right and in the case of the US they must also sort out their
trade and budget deficits. No less a person than Alan Greenspan
last week commented that the US economy risks stagnation or
worse unless these deficits are addressed. The consequences
for the US dollar are also dependent on how this plays out.
Some home truths
Here at home there are also areas of concern.
Yes oil and gas prices continue to be high and significantly
above budget and yes there are also higher levels of gas production
and foreign direct investment all leading to increases in
government revenues and economic growth.
However, the fact that it is the capital intensive energy
sector that is generating growth as opposed to the more labour
intensive manufacturing and agricultural sectors suggests
that job creation is being fuelled more by government programmes
than true market forces.
We have seen in the past that the absence of meaningful long-term
job creation coupled with a rising cost of living can create
a volatile situation.
Recent Central Bank statistics indicate that food prices have
risen by 23.3 per cent over the 12 months to 2005.
The rise for the 12 months ending January 2005 was 18.3 per
cent so we experienced a full five per cent increase in this
benchmark from January to February.
The year-on-year increase of 23.3 per cent is the largest
such increase in 16 years.
The last time we experienced these types of food price increases
(1989), T&T was in a recession and the following year,
1990 there was the infamous attempted coup.
market the key
forward to today and we are witnessing another era of lawlessness
in our society. As Dr Rolph Balgobin (executive director,
UWI IOB) in an article in last weeks BG puts it, T&T
needs to be thinking about wealth creation when it thinks
its biggest problem is wealth redistribution.
The capital markets, especially the stock market, offers one
of the key mechanisms for wealth creation in a developing
economy such as ours.
As a result, it is important for the regulatory and economic
authorities to send the appropriate signals at the appropriate
times in order to ensure that confidence and stability is
maintained in the market over the long term.
The higher food prices have contributed to headline inflation
of 6.9 per cent for the 12 months to February 2005. This represents
a full one per cent increase over the position in January
2005. High levels of inflation generally have a negative effect
on the equity market.
The Central Bank is on record as targeting an inflation rate
of 4-5 per cent. In an attempt to stem the inflationary trend
the bank adjusted its repo rate by 25 basis points to 5.25
This was done in March when the inflation trends for January
were published, in April the repo rate remained unchanged.
Where do we go from here is the million dollar question. There
is surplus liquidity in the economy. This coupled with increased
levels of expenditure by the Government on capital projects
over the next two years if not managed properly can further
fuel an inflationary trend. Will inflation erode consumer
spending and affect corporate earnings?
The high levels of TT dollar liquidity will seek out TT assets.
Stocks and property are the two most obvious examples of this.
Does this mean that property and stock market valuations will
Increasing interest rates beyond what is required to maintain
exchange rate stability may have a negative impact on the
non-oil sector. Does this mean that job growth will remain
further dependent on government programmes along with the
social implications that goes with this phenomenon?
The answers to these questions will unfold over the coming
As an investor you cant control the market. What you
can do is take a long term view of your equity investments
and then invest in strong companies capable of generating
consistent returns over your investment horizon.
Ian Narine can be contacted at [email protected] or at http://www.wiseequities.com
The contents of this article is not to be used or considered
as an offer to sell or a solicitation of an offer to buy.
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any opinions therein are based upon, sources believed to be
WISE makes no representation as to its accuracy or completeness
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