MARKET BRIEF | Q1 2022
Arocky start to 2022 for the equity markets with growth stock trading at deep discounts from increased selling pressure due to a cocktail of negative factors. Surging inflation, interest rate hikes, Russian-Ukraine warfare and its ongoing fallout were at the epicentre of the underwhelming performance within the capital markets. The S&P 500 suffered its biggest quarterly decline in two years, falling almost 13%, but finishing the quarter with a 4.9% rebound as geopolitical event dominated market behaviour from February onwards. The Fed made its first steps, a 25bps (basis points or 0.25%) rate hike in March, its first attempt to begin taming the absurd levels of inflation. Inflation now stands at 8.5% reaching a 41-year high. This move by the Fed, however, has long been anticipated by investors indicated in market reaction as falling equities reversed course to close in the green. The Fed’s reluctance to raise rates has two motivations, the interference of hiring and even more importantly, avoidance of tipping the economy into a recession.
Over the first quarter of 2022, U.S. equities and bonds have displayed drastically different outlooks for growth. Many investors have even ignored the brief inversion of the Treasury yield curve, a sign, which has been a predictor of six out of seven recessions. An inverted yield curve occurs when rates on short term government debt exceeds those on longer term debt. While this is not the only factor when predicting a recession, it has been proven to be a reliable one in the past. Looking back, not every interest rate hike series has led to a recession, only the ones that resulted in an inverted yield curve, did. The bond market shows a markedly more pessimistic view on the economy than equities with the benchmark 10-Year Treasury up 81bps this quarter alone. This may indicate that the stock market quite possibly has not baked in risks well enough. It remains to be seen, which perspective will prevail.
Theoretically stocks are supposed to perform poorly with interest rate hikes, historically however, this has not always been the case, even so, it is known that the past is never an indicator of the future. Strict sanctions on Russian imports and frozen assets amplified existing inflation concerns as disrupted commodities and oil imports sent prices soaring. European markets took larger hits due to closer ties with Russia and Ukraine, more notably Russian oil and gas. The Asian stock markets ended the quarter slightly higher than its year end 2021 level after experiencing similar weakness as the US markets in January and February. US interest rate hikes aided the market dynamics seen in Japan where value stocks outperformed growth particularly in the financial sector. Emerging markets, excluding Latin America and main commodity exporters, were left behind this quarter as they ended in the red due to inflation fears from surging commodity prices.
The path out of the pandemic slowdown has been marred by an unfortunate war, bringing with it a fresh set of uncertainties and consequences yet to be discovered. Energy and utilities, relatively, were amongst the strongest performing sectors, outperforming an overall bear market with muted gains. Technology, communication services and consumer discretionary were amongst the weakest sectors.
Both short term and long-term opportunities can be found even in these harsh and uncertain conditions. Panic based selling has created several attractive entry points for investors looking for high growth potential. Being prepared for a paradigm shift once the near zero rate environment is no more, a well-diversified portfolio focused on quality will provide the necessary volatility protection, income and capital gain exposure to meet most investment needs. Investors are encouraged to closely follow the Fed’s ability to engineer their “soft landing” moderating inflation back to 2.5% by year end, supply chain disruptions and war repercussions.
Partially influenced by the aforementioned market drivers in a low growth environment together with hindrances in the local capital markets which stifles investor sentiment, domestic market indices ended Q1 2022 relatively in the red. Leading the decline was the Cross Listed Index (CLX) which contracted 10.6%, attributable to a 20.0% price decrease in its largest market capitalization stock, NCB Financial Group Limited (NCBFG) and an 8.7% contraction in Guardian Holdings Limited (GHL), of which NCBFG holds a 61.8% stake. Despite experiencing upbeat momentum in majority of its segments, NCBFG’s Earnings Per Share (EPS) for the quarter ended December 31st, 2022 (Q1 2022), declined 30.7% to TTD$0.05, influenced by a 70.0% decline in Gains on Foreign Currency and Investment Activities. With the removal of restrictions, the upbeat momentum in tourism and economic activities together with the possibility of additional interest rates hike in Jamaica, NCBFG could see improvements to its financial performance in the coming period.
The Trinidad and Tobago Composite Index (TTCI) ended the quarter 2.7% whilst the All Trinidad and Tobago Index (ALTT) marginally improved 0.1%. Agostini’s Limited (AGL) recorded the largest price increase of 42.2% during Q1 2022 attributable to financial expansion in all its business segments, resulting in Revenue growth of 17.4% for the period ended December 31st, 2021 (Q1 2022) and a 39.7% increase in its EPS. The Group continues to engage in acquisition activities for expansion and is likely to benefit from economic growth initiatives in Guyana and Suriname. However, although AGL improved its dividend payment to $0.90 for FY 2021 relative to an average of $0.69 between FY 2017 to FY 2020, AGL’s trailing 12-month dividend yield currently stands at 1.9% relative to an average of 2.9% between FY 2017 to FY 2020, reflecting the material increase in its price.
Dividend aristocrat, Scotiabank Trinidad and Tobago Limited (SBTT) was the second highest gainer, appreciating 17.1% followed by Angostura Holdings Limited (AHL) which added 12.3%. AHL experienced 1.8% growth in its revenue for the year ended December 31st, 2021 (FY 2021) and an 8.7% increase in its Profit After Tax (PAT). Although the group may be subject to additional cost from global inflationary pressures, AHL is likely to recognize further expansion to its revenue owing to:
- removal of restrictions
- seasonal demand locally from Easter and the occurrence of Carnival in 2023
- strong global brand name
- continuous product launches.
During the quarter, MASSY Holdings Limited’s (MASSY) shares were cross listed on the Jamaican Stock Exchange in January and its shares underwent a 20-for-1 stock split March. The stock (on a converted basis) ended the quarter 1.1% higher.
The West Indian Tobacco Company’s (WCO) price preceded NCBFG as the second largest decliner, falling 15.8%, influenced by a 5.3% decline in its revenue for the year ended December 31st, 2021 (FY 2021) and a 7.4% contraction in its EPS, driven by lower economic activities, the closure of entertainment channels locally and higher overhead cost from increased Brand Support Expenditure and IT Shared Service Cost. In addition to continuous efforts to improve its margin and benefits from economic reopening but tempered by competition from substitutes, WCO may experience financial improvements in the coming periods.
Among a plethora of economic pressures, higher energy prices globally are a positive sentiment for Trinidad and Tobago’s (T&T) relatively depressed revenue earnings. After experiencing a low of 41.6 in April 2020 due to the pandemic, the Energy Commodity Price Index recovered to 164.6 in February 2022. This does not reflect price increases from Russia invasion of Ukraine, so it is likely to increase. Trinidad and Tobago NGL Limited (TTNGL) benefitted from more than 100% increase in NGL prices, higher NGL content in its gas supply and higher production from gas processing. As a result, TTNGL’s Total Income advanced 363.6% to $212.8M at the end of December 31st, 2022 (FY 2022) whilst its EPS increased from $0.04 to $3.31. Domestic energy production has been TTNGL’s biggest challenge. However, the number of exploration projects carded to come on board and the group’s increasing global footprint in North America, Mexico and Latin America are likely to cushion its performance in the near term. Regardless, it remains to be seen whether higher energy prices could lift TTNGL’s price going forward or whether longer term production challenges and global zero carbon emissions initiatives would keep this in check. With a 39.2% year on year (YOY) price increase, this could be a beneficial opportunity for risk averse investors holding the stock to average out and seeking other longer-term plays, in line with risk appetite.
Although T&T may experience higher than estimated revenue, it is unlikely that this may have any material impact on the longer-term growth of the economy due to limited focus on capital expenditure in addition to Debt to GDP ratio north of 80%. Businesses may experience marginal improvements after roughly 2 years of restrictions but given T&T’s dependence on imports, global inflationary factors, together with higher freight, and foreign exchange challenges could dent corporate profits and present challenges specifically to discretionary businesses.
Investors can continue to keep an eye out for geographical expansion activities, acquisitions, resilient revenue and dividend paying opportunities by locally listed companies to identity possible opportunities. Additionally, local investors should cater for the liquidity issue that continues to plague the domestic market when making investment decisions.
Written by:Leeann Ramdial & Sharda Goolcharan
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