MARKET BRIEF
” Successful investing is about managing risk, not avoiding it” — Benjamin Graham
INTERNATIONAL MARKETS
- US Federal Fund Rate at 4.50% as at December 2022
- Inflation at 7.1% as at November 2022
- Core Inflation at 6% as at November 2022
2022 started with a bang as growing optimism for a global post Covid recovery quickly panned towards a scramble to pare losses, as markets plunged to decade lows. While inflation rates were rising, supply chain bottlenecks were seemingly easing as the world’s economies reopened.
Q1 2022 unfortunately ushered in the Russia-Ukraine war, rising inflation and the start of one of the steepest rate hiking cycles, historically. Markets slid on the initial news, rebounding shortly towards the end of the quarter, with crude oil and gold being some of the only assets rallying throughout the quarter. Reality gripped global markets as inflation rose to highs not seen in decades during Q2 2022.
Rate hikes became increasingly more aggressive, as investors observed their first recession indicator, the yield curve inversion, a leading predictor of most recessions in the past. Most major indices sunk into bear territory following these developments with growth focused stocks being the hardest hit, whilst the US 10-year treasury yield rose to 3% and the US dollar strengthened. Though stocks started trending closer to fair value as price to earnings multiples declined significantly, earnings were only impacted in Q3.
Earnings expectations fell drastically on another round of negative news. Euro dollar fell to parity with the US dollar and Russian gas supply cuts tacked on fresh concerns for a year end UK recession. Speculations for a Fed pivot as inflation remained resilient, reversing some losses moving into Q4.
Earnings fared better than expected but failed to provide the support equities desperately needed to hedge some of their worst losses, save the energy sector and to an extent, cyclicals. Forecasts for a 2023 shallow recession globally were released expecting recovery during the latter half of the year.
Investor Takeaway
Investors should brace for more volatility into the first half of 2023 as a hard landing isn’t completely ruled out.
Investors were left with nowhere to hide from the losses that accompanied 2022. The energy sector closed the year in the green while utilities and consumer staples took a defensive role and healthcare stabilized. Though markets recouped up to half the losses for the year, investors are not out of the woods yet. Investors should brace for more volatility into the first half of 2023 as a hard landing isn’t completely ruled out.
…investors can seek to add stability to portfolios by increasing duration via high yielding investment or government bonds.
However, as interest rates stabilize through to the second half of the year bonds are expected to reset their performance and become less correlated to stocks in performance. The Fed may also be looking for more permanent signals that inflation has in fact been tamed before announcing any rate cut or pivot. Given the level of uncertainty surrounding growth prospects and inflation, investors can seek to add stability to portfolios by increasing duration via high yielding investment or government bonds. This presents investors with a very strong opportunity to restructure or build a very well diversified portfolio with fixed income being once again able to provide its most preferred characteristics of income, stability and diversification against riskier assets.
LOCAL MARKET
- Repo rate maintained at 3.50% in December 2022
- Acquisition activities dominated Q4 2022
- CIF exits the market
Following global sentiment, locally listed equities continued their downward spiral to end FY 2022 in the red. The Trinidad and Tobago Composite Index (TTCI) contracted 11.0%. Meanwhile, the Cross Listed Index (CLX) recorded the steepest decline of 29.0% as cross listed stock prices took a larger hit, with NCB Financial Group Limited (NCBFG) and GraceKennedy Limited (GKC) contracting 43.0% and 28.0%, respectively. Stocks that trade solely in Trinidad were more resilient with the All Trinidad and Tobago Composite Index (ALL T&T) depreciating just 3.7%. Agostini’s Limited (AGL) was the top gainer in 2022, appreciating 53.8% followed by Angostura Holdings Limited (AHL), Scotiabank Trinidad and Tobago Limited (SBTT) and Trinidad and Tobago NGL Limited (TTNGL), which added 33.3%, 13.3% and 13.2%, respectively.
MASSY dominated acquisition activities in Q4 2022 through its acquisition announcements of Air Liquide Trinidad and Tobago Limited, Rowe’s IGA Supermarkets Limited and I.G.L. (St Lucia) IBC Limited. These activities are expected to strategically enhance the group’s revenue base and geographical exposure, which should improve MASSY’s return to shareholders. TTNGL completed its acquisition of a propane terminal in Minnesota, USA in December whilst AGL finalized the acquisition of Collins Limited and Carlisle Laboratories Limited, expanding its footprint in Barbados.
On another note, as all good things must come to an end, the last day of trading for the Clico Investment Fund (CIF) was December 30th, 2022. The fund was terminated on January 2nd, 2023, and the fund assets will be transferred to unitholder’s brokerage accounts at the end of January 2023. RFHL continues to exude strong fundamental performance and maintains geographical diversification of its revenue streams relative to its peers. Additionally, the group recently made its foray into the life insurance business which should bode well for its revenue growth.
The 1-year government bond yield remained relatively unchanged at 1.05% in November 2022 relative to 1.04% in September 2022. Looking at the medium to longer term, the 10-year bond yield jumped from 4.99% in January 2022 to 5.16% in November 2022. While there has been improvement to credit conditions in the form of financing for business expansion, the Monetary Policy Committee maintained the repo rate at 3.5% in December, due to global uncertainties and in support of domestic business expansion.
Investor Takeaway
Continuous liquidity challenges on the TTSE together with limited investing options in a slightly improving but – significantly challenged – economic environment, could keep P/E ratios higher which can make local equities unattractive or more expensive in the short term. Earnings in the Banking Sector and the Non-Banking Finance Sector could face some headwinds to its insurance portfolios and as financial market volatility continue into 2023. However, improving economic conditions could lead to growth across loan portfolios and deposits, though this can be tempered by inflationary pressures in the short term.
The Conglomerate Sector could experience upward movements owing to the revenue resilience, geographical and revenue diversification among sector peers. Lower disposable income, persistent inflation and foreign exchange concerns – among others – could result in lower profit margins especially in the Manufacturing and Trading Sectors. The sole energy company in the Energy sector could benefit from elevated energy prices and stable NGL demand in the short to medium term whilst feedstock supply could present challenges.
…moderate to aggressive longer-term generational wealth investors could find value…
Despite challenges in the short term, moderate to aggressive longer-term generational wealth investors could find value in companies (i) with strong balance sheets positioned to rally through recessionary pressures, (ii) engaging in acquisition activities, (iii) seeking geographical exposure, and (iv) those with a resilient revenue base.
On the Fixed Income front, (i) higher commodities prices, (ii) the GORTT’s aim to reduce its debt to GDP ratio, and (iii) access to cheaper finance through multilateral institutions as discussed in T&T’s 2023 budget, could result in limited issuance of new sovereign debt in the near term.
Written by:
Leeann Ramdial & Sharda Goolcharan
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