MARKET BRIEF | Q3 2022
“Successful investors demonstrate caution in frothy markets and steadfast conviction in panicky ones” — Seth Klarman.
INTERNATIONAL MARKETS
- Equity markets sank during the quarter as the Federal Reserve remained steadfast in its approach to raising interest rates. European stocks, especially, underperformed.
- Yields climbed, with the 1-year U.S. Treasury Bill rate hitting a high, last seen 20 years ago. The yield curve remained inverted, signalling that a recession lays ahead.
- The U.S. dollar continued its unassailable rise this year, with the Euro now trading below parity and the GBP and Yen trading at multi-year lows relative to the greenback.
- Commodity prices stabilized a bit, but not enough to provide respite to the inflation levels that is being suffered by the average consumer.
- Emerging market assets struggled due to the aforementioned strength in the dollar, but relative to developed markets, their underperformance levelled off.
What began as a somewhat hopeful relief rally, ended with global equities tumbling to new lows in an unsurprising fashion. Already battered equity and bond markets closed the quarter with some of their worst returns. Major indices such as the S&P 500 (-9.34%), Dow Jones Industrial Average (-8.34%) and the Nasdaq Composite (9.11%) were in clear, bear territory at the end of Q3 2022, while bond yields, notably the US 10- Year Treasury (3.289%), topped historical levels.
All sectors across the broad-based market, save the energy sector, posted significant losses…
This drag in performance was largely driven by a persistently hawkish Fed that pursued an aggressive tightening policy, the energy crisis as a ripple result of the Russia-Ukraine war, stubborn inflation, and an almost certain risk of a recession. All sectors across the broad-based market, save the energy sector, posted significant losses as expectations of a Fed pivot dampened amid a labour market that continues to remain resilient.
This energy crisis almost guarantees a recession in the Euro-Zone…
Headline inflation estimated at 8.1% year on year as at September 2022 showed mild softening in response to interest rate hikes, however core CPI inflation rose from 6.3% to a estimated 6.5%. Central banks require much cooler conditions in employment and wage growth to bring the inflation levels down to their 2% target. Though these are lagging economic indicators, further confirmation that job markets are slowing is needed to back down from the current hiking cycle. Oil prices were also impacted again, this time not because of the war, but because of OPEC+’s decision to cut supply by 2M barrels a day, starting November 2022. This energy crisis almost guarantees a recession in the Euro-Zone as sky high inflation may become more persistent, with even higher oil prices.
Sharing the limelight with oil prices, the US dollar showed remarkable strengthening throughout Q3 2022. Global currencies experienced large fluctuations towards extremes, mainly influenced by the factors outlined above. Though the dollar has been on the uptrend for a decade or more, it has experienced a larger appreciation due to the Fed’s hawkishness and its status as a safe haven during volatile markets. Weakness for the dollar will only be possible once inflation pressures and high energy prices subside, leading to a less hawkish Fed. Q4 2022 may continue to show further upside for the dollar.
Data shows these measures, thus far, have been insufficient to revive growth.
A global recession has been on a major topic across the board for most of 2022 and the risks of it becoming a reality is becoming highly likely. The Euro-zone and The United Kingdom is likely to have a difficult quarter ahead as they grapple with surging inflation and higher energy costs, repressing consumer demand and industrial sectors. The European Central Bank is expected to continue tightening monetary policy and implement price caps on energy commodities in hopes of capping increases. Covid-based restrictions in China continue to depress economic growth, despite stimulus procedures rolling out via rate cuts and infrastructure spending. Data shows these measures, thus far, have been insufficient to revive growth. Global growth forecasts have been revised lower as we head into the final quarter of 2022.
Investor Takeaway
Inflation has dominated headlines and remains the monster to be tamed in many first-world economies. Contractions in advanced economies are expected as we move into Q4 2022. US economic growth should start slowing as effects of rate hikes and the dollar surge take hold. Though forward inflation expectations are contained, the Central Bank’s hawkish stance will most likely persist until both headline and core inflation show a convincing downward trend. Various market conditions present investors with unique and new opportunities, even the most volatile ones. Expectations of a strenuous quarter as evidenced by the negative investor sentiment plaguing markets, could indicate that the market may have already priced in low growth and disappointing Q3 2022 earnings. Unemployment rates are still low, and any impending recession intensity, duration and risks may be lower providing the Fed’s pivot timing is just right. Weakness of the dollar could be beneficial for non-US equities, should the Fed become less hawkish.
Investors may find solace in riding through the Q4 2022 bearish wave by holding steady in a well-balanced diversified blend of equities, bonds, and exchange traded funds.
The markets paint a deeply oversold and now undervalued picture for most risky assets, however the negative sentiment could imply that there are limited buyers of last resort. Investors may find solace in riding through the Q4 2022 bearish wave by holding steady in a well-balanced diversified blend of equities, bonds, and exchange traded funds. Companies with healthy cash balances, fortress balance sheets and great strategic moats will show resilience during declining and sluggish economic growth. Dividend paying stocks will help buffer potential losses within a portfolio. Additionally, high-quality investment grade bonds, such as sovereign bonds, which received improved valuations, could provide a solid anchor to portfolios, complemented by variety of broader based exchange traded funds.
LOCAL MARKET
- Local equity markets remain challenged much like their international peers. However, the depth and breadth of decline in stock prices has been significantly better.
- Local interest rates continue to climb despite no rate increases by the CBTT MPC in its September meeting. The pull-effect from U.S. interest rates, likely remains a key factor.
- Natural gas production is expected to average 2.75 bcf/d in 2022 relative initial estimates of 3.4 bcf/d.
- A hike in fuel prices, along with other restrictive fiscal measures may challenge disposable income in FY 2023 relative to the long-run potential growth rate of the economy.
- A new dual listing of AS Brydens & Sons Holdings Limited may attract more retail investors into the stock market, improving liquidity and the overall capitalization of the index.
Domestic equities continued their downward spiral into the 3rd quarter in 2022 (Q3 2022), partially influenced by the aforementioned factors and subdued investor sentiment. The Trinidad and Tobago Composite Index (TTCI) contracted 10.3% on a year-to-date basis. Further, there was a 17.1% Quarter on Quarter (QoQ) decline in volume traded from Q2 2022 to Q3 2022. Massy Holdings Limited (MASSY) was the volume leader, with 10.2M shares being traded, followed by FirstCaribbean International Bank Limited (FCI) and JMMB Group Limited (JMMBGL) with 8.6M and 7.5M shares traded, respectively. The All Trinidad and Tobago Index (ALTT) showed more resilience, contracting 3.3% YTD. Meanwhile, the Cross Listed Index (CLX) declined 28.2% at the end of Q3 2022, heavily influenced by a 43.8% decline in NCB Financial Group Limited (NCBFG) and a 10.3% decline in MASSY, which account for 39.3% and 30.6%, respectively, of the CLX.
Both Agostini’s Limited (AGL) and Angostura Holdings Limited (AHL) experienced the largest price increases of 38.5% to close the quarter at $45.00 and $24.93, respectively. Scotiabank Trinidad and Tobago Limited (SBTT) was the 2nd largest gainer, appreciating 14.5%, followed by Trinidad and Tobago NGL Limited (TTNGL) which advanced 2.6%. Subsequent to NCBFG, West Indian Tobacco Company Limited (WCO) was the second largest decliner for the Q3 2022, contracting 21.1%, followed by Unilever Caribbean Limited (UCL) and First Citizens Group Financial Holdings Limited (FCFGH) which depreciated 19.8% and 19.7%, respectively.
…food inflation rose 10.9% YoY in August 2022 in comparison to a 5.7% in December 2021.
The 1-year treasury yield jumped 74 basis points (bps) from 0.37% at the end of December 2021 to 1.11% in August 2022, likely reflective of inflationary pressures. At the end of August 2022, headline inflation increased to 5.9% YoY, relative a 3.5% YoY increase in December 2021. Similarly, food inflation rose 10.9% YoY in August 2022 in comparison to a 5.7% in December 2021. Looking at the medium to longer term, the 10-year bond yield rose to 5.12% in August 2022 relative to 4.99% at the start of the calendar year, whilst the 30-year yield stood at 7.02% for the same period, up 13 bps from October 2021.
Investor Takeaway
For Fiscal Year 2023 (FY 2023), the Minister of Finance announced several fiscal measures to deliver a budget deficit of TT$1.5B. However, after the highly oversubscribed APO of FCGFH in FY 2022, the budget did not directly present capital market opportunities for investors. Instead, a full tax holiday for new companies to list on the SME tier of the Trinidad and Tobago Stock Exchange (TTSE) has been extended from 5 to 6 years. While this measure has been in place for at least 2 fiscal years, only 2 companies are presently listed on the Exchange. The relatively large informal sector in Trinidad and Tobago and the reluctance of businesses to disclose information are likely to remain a major hindrance to this initiative. In FY 2022, the Minister of Finance hinted at an Initial Public Offering for the soon to be created Trinidad and Tobago Mortgage Bank (TTMB), however, no mention of this was made in the FY 2023 statement.
As the sole cement provider to Trinidad and Tobago, Trinidad Cement Limited (TCL) is likely to experience top line growth from the infrastructure and housing projects announced with (i) $200M being allocated to the new Secondary Road Rehabilitation and Improvement Company Limited, (ii) $250M allocated to loan financing for The Ministry of Works and Transport for The Road Upgrade and Enhancement Programme, (iii) $1B for its Development Program in 2023, (iv) increased allocations in other line items for road repairs at the district level and (v) intentions to provide the Housing Development Corporation (HDC) with loans totalling to $1.5B. However, while this could boost the company’s revenue generation, structural issues continue to challenge TCL.
The proposed Long-Term Loan Guarantee Scheme for SMEs in the non-energy sector, which amounts to $500M and would be managed by First Citizens Bank in collaboration with other commercial banks, should bode well in terms of expanding banks loan books. This should benefit companies in the TTSE’s Banking Sector like FCGFH, SBTT and RFHL. The guarantee by the government for up to 80% of this loan value should reduce concerns around credit losses, thereby improving access to the facility.
Natural Gas production for the calendar year 2022 is forecast to average 2.75 billion standard cubic feet per day (bcf/d) relative to an initial forecast of 3.4 bcf/d (FY 2022 budget statement). Going forward production is expected to average just under 3 bcf/d in 2023 with several energy exploration projects on the pipeline. This nascent improvement to production, albeit lower than initial forecasts, should be beneficial to TTNGL in an environment of relatively upbeat energy prices.
An additional $500 tax shield, a reduction in taxable income, and one-off social grants from an expenditure value of $57.7B, would not materially improve disposable income…
Increases in fuel prices, the implementation of the property tax, continued import dependency, a strong US dollar, foreign exchange issues, global recessionary concerns, and potential increases in utility rates among other factors are likely to lead to a weaker consumer-demand picture. An additional $500 tax shield, a reduction in taxable income, and one-off social grants from an expenditure value of $57.7B, would not materially improve disposable income when the general economic condition continue to challenge the standard of living of citizens. However, boosts to the energy sector, which accounts for almost 50% of GDP, should theoretically lead to a multiplier effect and potentially improve Trinidad and Tobago’s economic situation going forward, if managed efficiently. However, volatile energy prices and recessionary fears could keep this in check.
In addition to the capital market opportunities listed above, Seprod Limited intends to list its recently acquired subsidiary AS Brydens & Sons Holdings Limited on the Jamaica Stock Exchange (JSE) in 2022 and on the TTSE at a date to be determined. Seprod acquired Trinidad-based AS Brydens & Sons Holdings Limited on June 6th 2022. AS Brydens has three principal operating subsidiaries (AS Brydens & Sons Trinidad Limited, Bryden pi Limited and FT Farfan Limited) and is a leading distributor of food, pharmaceuticals, hardware and industrial equipment in Trinidad and Tobago, Barbados and Guyana. This listing can provide competition and possibly increased innovation among potential competitors MASSY, AMCL, GKC and AGL, while strengthening the liquidity and market capitalization of the index.
Despite the TT/US interest differential on 3-month treasuries reaching -236 bps in August 2022 amidst rising price levels and economic uncertainty, the Monetary Policy Committee of the Central Bank of Trinidad and Tobago made the decision to maintain the repo rate at 3.5% in its quarterly meeting. This was prompted by improved liquidity and strengthening demand for credit by businesses. However, (i) central banks have been increasing rates globally and (ii) domestic inflation figures are yet to reflect further increases in fuel prices in Q4 2022 among other inflationary factors, which could potentially influence an interest rate hike in the near term.
Written by:
Leeann Ramdial & Sharda Goolcharan
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