Are we at the start of a local bull market?

How many of you are aware that the local stock market has outperformed the three main US stock markets between the beginning of the year and Tuesday? According to information from the Morningstar Web site yesterday morning, year-to-date the Dow Jones Industrial Average was up by 3.59 per cent, the NASDAQ Composite by 2.50 per cent and the S&P 500 by 2.76 per cent. Meanwhile, the composite index of the T&T Stock Exchange, which some are trying to talk down, was up by 4.17 per cent year to date. It would be useful for the high net worth individuals and the members of the working middle class with surplus funds—to whom I would like to dedicate this column—who are running down the Yankee dollar to keep in mind that the local stock market is outperforming the US markets so far this year.

Which high net worth individuals and members of the middle class with surplus funds am I referring to?
You know yourselves: the multi-millionaire manufacturer, merchant or energy executive with the FYFs and the condos in South Beach or Kensington; the doctors, lawyers, bankers, accountants, company executives and government ministers whose monthly incomes exceed $40,000 or even the senior public servants and mid-level executives who earn between $20,000 and $30,000 a month. You are the people—and there are thousands of you in this country—who Central Bank Governor, Ewart Williams, referred to earlier this month when he spoke about people warehousing US dollars. You are the ones who joined a queue for the greenback at your commercial bank last month and are back in the queue this month. Many of you support the People’s Partnership with your mouths, but operate to undermine the government and the country at every turn with your cheque book, credit card and your foreign bank accounts.

I know that you feel the need to protect your wealth (also known as the “l’il cacadah”) which most of you have worked hard to achieve, from the depreciating impact of the high local rate of inflation. And I know that many of you are not exactly brimming over with confidence in the way that the economy is being managed—given the way Cabinet ministers went out of their way to “mauvais langue” the economy in the first few months of this administration and the way the Minister of Finance is “muddling through” the Clico issue, the contractors’ issue and the public servants wage negotiations. (Muddling through is the term used by the S&P rating agency in its January 14 assessment of T&T). I also know that many of you are being advised that holding a significant part of your wealth in a foreign currency is the way to protect yourself against inflation, the possibility of a depreciating currency (in the scheme of things, a 2.3 per cent variation in the exchange rate of the TT dollar in the last 15 years is nothing) and the “muddling through” of our politicians.

I know that there are local investment advisers who are suggesting that it would be better to invest in the US markets than in the local or regional markets in 2011. On Monday, in the Bourse column in the Express, Independent Senator Subhas Ramkhelawan wrote: “Looking ahead, the domestic equity market is expected to be subdued and as such investors may want to consider investments in the international markets, where the outlook for economic growth and higher corporate earnings is likely.” At a function at the T&T Chamber of Industry and Commerce on January 14, Amoy Chang Fong, the chairman of the Unit Trust Corporation, said the following, “Looking further into 2011, local stock market performance is likely to be flat relative to 2010 as falling household consumption (due to some retreat in employment levels and reduced purchasing power), declining government expenditure (arising out of reduced energy sector revenues) and an overall retrenchment in private sector investment are all likely to weigh heavily on corporate earnings.  The manufacturing, distribution and construction sectors would be particularly affected in our view.”

Ms Chang Fong also said that the UTC’s “outlook is subdued,” for the local stock market “as the global recession is continuing to cast a long shadow” but that “there will be opportunities in the external equity markets, where there are still some risks, but careful asset class and asset selection will drive our strategy.” I do find it very interesting that the 2011 outlook for the local stock market from these two experienced, sober and intelligent analysts of the local economy (and the outlook of those who continue to prefer the US dollar to the TT dollar) could be so at odds with my own perception of the prospects of local equities. Isn’t it interesting that Ms Chang Fong, the chairman of the UTC, and Mr Ramkhelawan, the managing director of Bourse Securities, would both diagnose that the performance of the local stock market would be “subdued” in 2011, but that there were “opportunities” in foreign equity markets.
Not exactly a ringing endorsement of either the UTC’s Growth and Income or the TT Dollar Capital Growth Fund from Bourse Securities, is it?

In fact, based on the advisories of Ms Chang Fong and Mr Ramkhelawan, I would not be surprised if there were a mass exodus from both of those mutual funds, which are heavily invested in the local stock market, with the money flowing into the US dollar mutual funds of the UTC and Bourse Securities.
The converters—that is those who are rushing to convert their TT dollars into US dollars or some other foreign currency—should know that not only has the composite index outperformed its US counterparts, the local stock market was up on 15 of the 17 trading days so far this year.  And at a time when money market funds for both US and TT dollar are yielding 2 per cent or less, the converters should know that there are a number of profitable companies listed on the local stock market with dividend yields of more than 4 per cent. These include NCBJ, Republic Bank, NEL, Witco and Unilever, which along with their steady dividend streams are also likely to generate some appreciation in their stock prices.

On Tuesday, the composite index of the Trinidad and Tobago Stock Exchange jumped by 1.53 per cent, moving from 857.41 to 870.55 on the back of $1 increases for NEL, Scotiabank and Witco. Given the low interest rates, the high rate of inflation and the unavailability of any other investments that are yielding a competitive rate of return, the question that the high net worth individuals and the cash-surplus working middle class should be asking themselves is this: are you likely to get a better return on your investment from converting and buying US assets or from diving into the local stock market? I personally think the answer is the latter and I have put my money (small as it is) into local stocks—including some of those mentioned in this column. I continue to maintain that 2011 will be the best year for local stocks since 2004 as, apart from the factors mentioned before, there are credible predictions that the economy will recover this year based on Government spending and a resolution to the “dark cloud” problems facing the economy.