Dec 12, 2008
FirstCaribbean revenue, profit diminished
FirstCaribbean Inter-national Bank Limited (FCIB) is expected to report year-end profits that have fallen off by US$80 million or 31 per cent when its earnings report becomes available.
[ more . . . ]

Dec 10, 2008
Global crisis hits Agostini’s rights issue
Agostini’s Ltd has suffered a shortfall in its rights issue which closed on October 22, 2008.
[ more . . . ]

Dec 08, 2008
BSE not fearful of crisis
THE Barbados Stock Exchange (BSE) does not foresee any major impact on its operations as a result of the global financial crisis
[ more . . . ]

Dec 08, 2008
FirstCaribbean affected by global financial crisis
THE current global financial condition has significantly impacted the net income of one the largest banks in the Caribbean.
[ more . . . ]

<< Opinions and Analysis

The View from a Wise Investor

February 20, 2004

The two indices used to measure the performance of the Trinidad and Tobago stock market; the Composite Index and the All T&T Index are both at their all time high. This represents a continuation of the bull rally as the market is already up 12% for the first seven weeks of the year. At this stage the outlook for the market for the remainder of 2004 continues to be positive.

The current rally began in 2003 where the Market generated a return of 27% as measured by the Composite Index. Much of the growth in 2003 can be attributed to events in the fourth quarter as a 4% decrease in the prime lending rate resulted in a transfer of capital from debt instruments into the stock market. This coupled with high levels of liquidity and buoyant investor sentiments arising from returns that have exceeded expectations have propelled more and more participants to enter the market.

There is a tendency by both new and seasoned investors alike to forge a correlation between the overall positive economic growth currently being experienced with a bullish stock market. Such an assertion is simplistic and ignores the performance of the companies themselves. History has taught us that stock markets are fickle, they move up and down.

The T&T and Jamaica stock market in contrasting ways demonstrates the assertion that there is no direct correlation between the economic outlook and stock market performance. The T&T economy grew every year from 1999 to 2001, yet the Composite Index because of international and political factors showed no net movement over the period. In contrast the Jamaican stock market grew by 48% in 2003 despite a troubled economy. In 2003 the Jamaican dollar fell by 20% against the US dollar and more recently Standard and Poor revised the long-term currency sovereign credit rating to 'B' from 'B+' and revised its outlook on the long-term ratings to negative from stable.

Events such as these represent a gloomy economic outlook however there are still opportunities for corporate profits. Trading and manufacturing companies for example with an export focus would benefit from a currency devaluation as this could potentially make such companies more competitive in their export markets resulting in better corporate performance and as a result higher share prices.

It is therefore important that the wise investor looks beyond the general economic outlook to understand that the stock market represents a view of corporate profitability at a particular point in time. Corporate profitability represents a narrow segment of the economy and therefore requires a more detailed analysis. Similarly the price of a stock represents an outlook for that individual company at a particular point in time and this outlook may be based on factors which may transcend the local economy.

The cyclical nature of the stock market generally arises out of the following scenario. Initially the stock market will rise based on sound business fundamentals and good corporate profits. Since all businesses exist for trade, what this represent is a transfer of wealth from consumers to shareholders. Over time this gives rise to an intangible “wealth effect” in that shareholders now have a higher net worth which may give rise to increased spending. If some of the cash flows from this increased spending are channeled back into the stock market a virtuous inflationary cycle develops resulting in a rally which eventually is based more on sentiment than on true business fundamentals. However the wise investor should note that any rally based even in part on sentiment would at some stage see a market correction back to its fundamental value thus resulting in the up and down cycle.

Strong economic fundaments (especially lower interest rates), good corporate profits and to some extent sentiment have all combined to factor in the current rapid rise of the Trinidad and Tobago market. However there are other factors which should not be overlooked. Over the past year the Trinidad and Tobago Stock Exchange (TTSE) has introduced measures that have added to the transparency of the market. The development of the Central Depositary has improved the turnaround time for share transfers. These factors have impacted positively on the market and the expected introduction of electronic trading during the second quarter of 2004 will also have a similar effect.

One could argue that the operational changes, positive though they may be, have thrown off the equilibrium of the market. Since these changes are not yet complete they may still be a factor in future price movements that some might deem irrational.

Despite this it is important that the wise investor understand that long term success in the market can only come from making rational investment decisions. A share certificate is not the same as a lottery ticket and should never be viewed as such. The Directors of the blue chip companies on the local stock market will not make a decision to purchase a company based on a trend line. So why would you want to do the same when you are investing in those companies?

In the long run stock tickers, graphs and trend lines don’t determine corporate profitability. Rather it has always been good corporate returns and strong business fundamentals in relation to macroeconomic conditions. This is the basis upon which investment decisions should be made and should be the main determinant in purchasing shares in a company. Any other view is speculative which as already discussed leads to volatility.

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