|2023 Total Return
|Dow Jones Industrial Average
|Bloomberg US Aggregate
|Trinidad and Tobago Composite
|All Trinidad and Tobago
|Cross Listed Index
- International markets performed admirably in 2023 after a disappointing 2022. The U.S. equity market was especially strong led by the technology sector, while Europe has recovered commendably from a variety of shocks.
- Emerging markets bifurcated and diverged most evidently in history in 2023 with China underperforming already weak expectations, while India outperformed even the most bullish predictions.
- Commodity prices moderated after a sharp spike in 2022 on the back of the Russo-Ukraine war, with a weak demand picture combined with surging U.S. shale oil production forcing OPEC+ to take unprecedented actions. Natural gas prices have also normalised.
- Junk-rated securities trounced investment grade bonds on an absolute, but especially on a duration adjusted, basis as predictions of a recession did not prove to be accurate.
- We expect 2024 to be a far more challenging year for markets. A very strong end to 2023 with the market rallying in Q4 on the “Santa Claus rally” possibly pulling forward returns from 2024. 2024 will also be the year of elections across the world, with many major, regional and local elections being conducted throughout the course of the following 12 months.
- Given our cautiously optimistic outlook, we recommend that investors maintain a small bias for non-investment-grade rated securities and start taking more duration risk, especially relative to equity markets.
The S&P 500 once again defied all expectations in 2023, producing close to a 27% total return in what was widely anticipated to be a negative year for equity markets globally. Most of the returns, however, came from a handful of companies dragging the Index along, as evidenced by the fact that the equal-weighted S&P 500 Index produced only half the return of the market-cap weighted Index. The Nasdaq 100 was also very indicative of this dynamic, with the Index up almost 60% on a year-to-date basis. The “Magnificent 7” and the rise of AI were the themes of the year, with companies such as Nvidia and Amazon producing outstanding returns after a tough 2022.
Internationally, the recovery in Europe picked up pace aided by lower natural gas and crude oil prices which had surged in 2022 following Russia’s invasion of Ukraine. Despite moderating inflation and lower demand, the continent still remains challenged, facing some structural issues that will require more long-term policy decisions to correct. Further, geopolitical tensions are at a multi-decade high, with no end in sight to Russia’s aggression in Ukraine, and conflicts simmering in the Middle East. Structural issues such as demographics also continue to plague parts of the world, with China especially in focus.
The country’s widely expected recovery brought about by a nationwide reopening from its Covid Zero policy deeply disappointed investors. Monetary and fiscal policy makers are responding to the challenges the country faces, but tensions in the South China Sea, especially with Taiwan and the Philippines, could be an area of concern. India, on the other hand, continues to benefit from offshoring from China, a strong fiscal stimulus, and relative stability in governance. The country has also managed to benefit from higher commodity prices despite being largely import dependent for its domestic needs. High refining capacity and rapid electrification have both been boons for the Indian economy.
Long-term Treasury yields in the U.S. peaked in the fourth quarter of 2023, with the 30-year rate rising as high as 5.1%. 30-year mortgages, which are benchmarked to Treasuries, peaked at close to 8%, the highest in over 20 years. By the end of the year, however, the rate was down to a still elevated but more manageable 7%. Short-term rates have also risen dramatically through the Fed’s rate hike cycle. U.S. 12-month Treasury Bills reached almost 5.5% by the middle of the year, after bottoming out close to 0% during the zenith of the pandemic. By quarter end, the rate stood at 4.76%, which is still extremely attractive from a historical perspective.
Inflation, which has been the leading cause of economic uncertainty, has declined from a high of 9.1% in June 2022 to 3.1% currently. Given that trendline, market expectations for the Fed to cut rates have risen astronomically over the past 6 months. Currently, the market implied probability of a FOMC rate cut by June stands at close to 99%. This expectation comes even as the Fed itself keeps emphasizing that its end-goal of a 2% inflation target still has not been met. This dichotomy between the Fed’s commentary, and the market’s hopes, could cause more volatility in the coming year. Core inflation, i.e. inflation sans of food and fuel prices, was higher at 4%, indicative of the effects of increase in rent and mortgage rates.
The U.S. dollar, which has been extremely strong since the Fed started hiking interest rates, finally weakened a bit towards year-end. A weaker USD has positive effects on the earnings potential of large-cap companies such as Apple and P&G, as well as commodity prices and emerging market assets. Meanwhile, credit spreads have also declined as expectations of a global economic recession faded through most of 2023. This allowed high-yield debt to outperform investment-grade paper, in line with our expectations and market positioning. Low unemployment and moderating wage growth has helped paint a more soothing picture of the labour market, which was reassured investors that junk-rated companies maintain their ability to repay their debts.
Despite the “everything rally” of 2023, strong undercurrents and pockets of concern persist in global markets. The Fed’s forward path in dealing with inflation isn’t clear, the PBOC has a weak Chinese property market to deal with, while countries such as South Korea and Japan continue to struggle with demographic challenges. On the other hand, many of the major areas of investor concern going into 2023 have not materialised. The U.S. economy never entered contraction, let alone a recession, global labor markets remain robust, and despite all the risks, geopolitical tensions have not led to contagion and expanded outside of their regional dispersions. Hence, we are maintaining our model positions for Q1 2024, which means a very minor overweight on EM equities and a much stronger overweight in non-IG fixed income.
Local indices ended Q4 2023 mostly advancing with the Composite Index (TTCI) marginally increasing 0.37%, the SME Index similarly climber 0.35% while the Cross Listed Index significantly outperformed with a rise of 10.48%, however the ALL T&T Index failed to keep up, declining 2.30% for the quarter. The overall performance for the year 2023 was less than impressive as all indices declined excluding the SME Index. The top three performing stocks included Gracekennedy Limited (GKC) 32.37%. National Flour Mills (NFM) 26.80% followed by NCB Financial Group Limited (NCBFG) 22.74% for Q4 2023. Conversely, the biggest laggards were Trinidad and Tobago NGL limited (NGL) 14.73%, West Indian Tobacco Limited (WCO) 12.75% and Massy Holdings Limited (MASSY) 10.25%. The overall annual leading and declining stocks unsurprisingly favoured the SME Index listed stocks as the top gainers included securities such as Endeavour Holding Limited (EHL), Prestige Holdings Limited (PHL) and Agostini’s Limited (AGL). Massy Holding Limited (MASSY) was the volume leader for the quarter trading approximately 7.69M shares followed by National Enterprises Limited (NEL) with a volume of ~2.15M shares. For the full year, MASSY was the volume leader with ~ 46.07M shares and NEL following in second with ~ 15.42M shares traded.
The quarter’s top stocks yielded positive returns for a variety of reasons. GKC performance can attributed to an increase in overall revenue leading to an improved profit before tax outcome as well as increased dividend payout. Further, during August, the company announced plans to acquire Unibev Limited which is expected to result in higher margins. The company’s decision to engage in a share repurchase initiative to boost stock price due to management’s view of the stock being undervalued. NFM took an alternative approach to support revenue margins by raising the wholesale and retail prices of their flour to abate the impact on the wheat market resulting from the war in Ukraine. Looking at the general basis for NCBFG’s performance, cost cutting measures, diversifying operational activity and higher interest rate environments contributed largely to a renewed interest in the company.
A host of listed securities underperformed with a multitude of casualties. TTNGL suffered from the temporary closure of one of PPGPL’s plants, lower natural gas volume outputs, challenges to dividend payments and overall weakened demand, pushing prices lower. Along the victims of weak top line growth was WCO, battling a decrease in consumer demand for cigarettes, as global markets move towards e-cigarette and electronic nicotine devices. The sizable dividend payout, introduction of their e-cigarette products and switch to Massy distribution may be beneficial to the company but by how much remains to be seen. While MASSY may have found themselves in the decliners the fourth quarter due to losses from discontinued operations, sentiment remains positive as a fundamentally strong and diverse company with positive revenue generation both historically and forward looking especially through their ventures into the US and Guyana operations.
The 1-year GORTT yield advanced 65 basis points (bps) to 1.70% in November 2023 from its November 2022 level of 1.05%. The 10-year yield also rose 3 bps from November 2022 to November 2023, to stand at 5.19%. Headline inflation eased to 1.10% (YoY) in November 2023 compared to 1.30% in October 2023. Food inflation significantly declined to 0.75% in November 2023. The Monetary Policy Committee held its repo rate constant at 3.50% in its December 2023 meeting citing a rapid slowdown in global inflation, less hawkish stance on monetary policies adopted by major global Central Banks and ample liquidity.
Local sentiment remains mixed and while the Central Bank kept interest rate steady, there is indicative evidence of a narrowing TT/US differential, concerns around fiscal spending persist. Geopolitical tensions, energy prices and over reliance on the energy sector are being closely monitored. However, global rate cuts and improving economic and financial conditions, growth in private sector credit and the non-energy sectors shed some light as we move into 2024. Short term outlook for equities remains neutral as we expect to continue seeing sector bias. Limited selection of securities on the local exchange heightens this bias and further reinforces liquidity challenges. A long-term buy and hold or passive strategy is recommended, diversified among sectors and asset classes. Equities that are dividend payers, stocks with long term growth potential and effective revenue growth drivers, operations and cost management are preferable over speculative investments that promise instant outsized returns. While there is growing demand in the Fixed Income sector, local options are expected to remain sparse and investors should remain vigilant for attractive fixed-income options should they arise.
Written by:Leeann Ramdial & Sharda Goolcharan
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