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“The big money is not in the buying and selling, but in the waiting.”
— Charlie Munger

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• U.S. and developed equity markets took a breather during the quarter after a strong first-half of the year. The upcoming third quarter earnings season may be mildly disappointing relative to current investor expectations.
• We expect monetary and fiscal policy support from the authorities to prop up the market in China. Despite the troubles in the property market, the PBOC (People’s Bank of China) has loosened policy to encourage growth in other sectors.
• Oil close to $100/bbl is negative for energy importing countries. Smaller developing nations, along with Europe, could take the brunt of the hit from record high diesel prices.
• Junk-rated securities continue to outperform investment grade bonds on an absolute, but especially on a duration adjusted, basis. 
• Our most notable recommendation for clients remains the same from the end of June, which would be to add fixed income to their US$ investment portfolios as it could outperform equities in the near to medium term, not just on an absolute basis, but particularly on a risk-adjusted basis.

INTERNATIONAL MARKETS

Historically August and September are known to be seasonally weak months for capital markets and this quarter showed no deviation from the norm as all major US Indices closed the quarter red, declining for both months. Q3 kicked off riding the widely reported “Magnificent Seven” AI fueled performance. The strength of these mega-cap weighted stocks on the S&P 500 is evident in the fact that the S&P 500 equal weighted index has significantly underperformed on a year-to-date basis. Further, bullish sentiment quickly faded as the Fed’s “high for longer” stance on rates was cemented. 9 of the major 11 sectors in the S&P 500 declined throughout Q3 with the Energy and Communications sectors being the only exceptions. Long-term Treasury yields surged through the quarter with the 30-year standing at 4.73% at the close of September, rising 84 basis points and the 10-year rising 74 basis points to reach 4.59% for the same period.

While the Fed’s restrictive policy pushed equities lower, the opposite effect was seen by the strengthening of the US Dollar for 11 straight weeks. Among assets pushing higher, oil prices have been trending upwards resulting from Saudia Arabia and Russia’s decisions to extend output cuts from July through to the year’s end. WTI crude oil rose as much at 29% during the quarter, this will have a decidedly significant impact on the global inflation fight. The outcome of the price increase was observed in a hotter than expected CPI report as of August with headline inflation coming in at 3.7%, largely due to this surge in oil prices while core inflation stood at 4.30%.

The Fed remained unnerved by this report as their sights are set on the tight labour market as its main target in controlling inflation. Thus far, job growth is still solid but is slowing and an improvement in participation rates would alleviate some of this tightness by easing wage growth. Markets are betting that a soft landing is still in play. However, as the lag between the Fed’s rate hikes and its subsequent economic impact widens, it is becoming increasingly difficult to predict when this pivot will occur, with a mild recession not expected until the latter half of 2024.

On the topic of global growth factors, China, whose post-reopening failed to impress investors due to significant challenges in their property market, has cast a dark cloud on overall global growth sentiment. Real estate accounts for near 30% of China’s GDP and China’s Evergrande bankruptcy filing and, housing developer Country Garden, toeing the line of defaulting has rocked the nation into a crisis. The result of this produces both winners and losers. On one hand, major importers and ordinary consumers seek to benefit from falling prices while competing exporters and major companies deriving revenue from the region will be hit the hardest.

Investor Takeaway

All things considered, while the U.S. has managed to avoid a recession thus far, we are more cautious moving into Q4. We see limited upside potential in equities as domestic and foreign earnings come under strain. This includes emerging markets equities, at least until the Fed begins lowering rates and the US dollar responds in kind. So long as the “higher for longer” monetary policy stance remains intact, short-term government bills and high-yield corporate bonds remain our biggest overweight recommendations.

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LOCAL MARKETS

Locally listed equity indices ended Q3 2023 in the red with the Composite Index (TTCI) contracting by 9.2%. Similarly, the All T&T Index and the Cross Listed Index declined by 7.68% and 14.5%, respectively. Leading the decline for the for the first nine months of 2023 were West Indian Tobacco Company (down 51.5%), Trinidad and Tobago NGL Limited (TTNGL) (down 44.4%) and NCB Financial Group (NCBFG) (down 39.3%). On the other hand, Agostini’s Limited, First Caribbean International Bank Limited, and Prestige Holdings Limited were the top gainers, adding 36.0%, 28.4% and 27.4%, respectively. Massy Holdings Limited was the volume leader during the quarter, moving ~14.4M shares, followed by GraceKennedy Limited (GKC) and National Enterprises Limited with a trading volume of ~3.7M and ~2.7M shares, respectively.

During the quarter, NCBFG announced its plans for an additional public offering and intends to hold an extraordinary general meeting to consider the same. The number of shares sought to be issued is expected to be up to 300M. Given the continued negative sentiment around the stock in the recent past, it is likely that the APO can have a dilutive impact to the group’s stock price. Additionally, Trinidad Cement Limited entered 2, 3-year revolving loan agreements for a cumulative sum of TT$50M for general corporate purposes which raises questions on the group’s cost management.  On a more positive note, GKC launched its share buyback plan. The group will repurchase 1% of its shares over a 1-year period, funded from its cash resources, which is expected to have a positive impact on GKC’s share price especially considering the company’s strong fundamentals.

The 1-year GORTT yield advanced 49 basis points (bps) to 1.55% in August 2023 from its December 2022 level of 1.06%. The 10-year yield dropped 2 bps from December 2022 to August 2023, to stand at 5.16%. Headline inflation eased to 4.1% (YoY) in August 2023 compared to 4.7% in July 2023. Food inflation, an important consideration to T&T’s economy, trended lower to 5.6% in August, down from a recent high of 17.3% in December 2022. Despite the continued gap in the TT/US interest rate differential, the Monetary Policy Committee held its repo rate constant at 3.5% in its September 2023 meeting based on decelerating prices and a pickup in private sector credit, both positively impacting economic activity.

On the energy front, natural gas production currently averages ~2.7 bcfd, leaving processing plants with spare capacity of 1.5 bcfd. However, the Minister of Finance (MoF), during his FY 2024 budget presentation indicated that natural gas production is expected to stabilize at ~2.6 bcfd in 2024 and ~2.5 bcfd in 2025. These levels are well below the 4.2 bcfd utilized by the petrochemical plants and LNG facilities at capacity levels. With at least 30.9% of FY 2024’s revenue expected to be derived from oil revenue, and both the IMF and the MoF indicating that the energy sector will be the main growth driver in the near to medium term, this is likely to dampen investor sentiment until material improvement to the country’s natural gas situation is noticed. The IMF and MoF project a growth rate of 3.2% and 2.7%, respectively, in 2023. In the longer term, Rystad Energy forecast gas production could possibly rebound to 4.0 bcfd by 2030 if key offshore projects are successful. These projects include Shell’s Manatee and Woodside’s Calypso field and possibly a breakthrough in the Dragon gas field in Venezuela. Furthermore, if realized, the improvements to production levels could bode well, in the longer term, for T&T’s sole energy stock, TTNGL.

While no significant measures were announced to move or impact the local financial market during the FY 2024, with a $54.0B budget, some subtle effects could come to fruition if all goes to plan. The increase in the minimum wage could marginally increase companies’ expenses. However, no major impact on disposable income could be expected, especially since the inflation rate is a dominating factor and the increase is expected to impact just ~14% of the population. Although the intention to develop strategies to boost the repatriation of foreign exchange could reduce costs for companies (theoretically), this measure could be challenged by the informal operations of the economy. Trinidad Cement Limited and Ansa Mcal Limited could experience top line growth if construction activities increase, influenced by loan financing to support the Housing Development Corporation (HDC).

Investor Takeaway

Banking stocks account for more than 55% of local market capitalization. Although the Central Bank kept interest rate steady, banking stocks are generally poised to do well in the context of improving economic conditions and rebound in financial markets relative to 2022. Investors should consider companies with high loan to deposit ratios, banks with geographically diversified and resilient revenue streams and healthy credit loss provisions. However, persistent liquidity concerns and the limited equity choices reemphasize the benefit of employing a medium to longer term passive investment strategy. Portfolios should consist of stocks with (i) the ability to provide shareholder returns mainly in the form of dividends, (ii) opportunities for revenue growth, (iii) stable and improving margins, and (iv) cost control measures.

Fixed income options are expected to remain subdued in the short to medium. However, stemming from the recent budget, the MoF announced the government’s intention to assist the HDC in accessing a further $700M in loan financing. This loan is not expected to be guaranteed by the government, but if realized, this could make new debt available for fixed income investors at a relatively attractive yield. Nonetheless, investors should continue to keep an eye out for refinancing debt options as we navigate the new fiscal year.

Written by:

Leeann Ramdial & Sharda Goolcharan

If you would like to speak with a trusted expert about what investment opportunities are right for you, please reach out to our helpful Wealth Managers at ANSA Merchant Bank.

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