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Will 2014 be another good year for local stocks?

Thursday, January 2, 2014
Larry Howai, Minister of Finance

Last year was a relatively good year for investors in the local stock exchange, as it is estimated that some 4,500 brokerage accounts were opened by new investors as a result of the establishment of the Clico Investment Fund in January 2013 and over 7,000 new accounts were opened by investors who bought First Citizens shares in September. Not only did the local stock market attract new investors, but it also reported decent returns with the All T&T Index increasing by about 18 per cent and the Composite Index up by over 11 per cent. This followed the performance of the local stock market in 2012, when  T&T-headquartered stocks were up by 15.5 per cent and the Composite Index advanced by 5.14 per cent. In 2011, the All T&T Index jumped by 24.77 per cent, while the Composite Index added 21.21 per cent. As of December 27, 2013, therefore, this means that in the last three years the index of the shares of companies based in T&T would have recorded a capital gain of 69.5 per cent, while the index of all the shares listed on the local stock market would have added 41.7 per cent. These returns do not include the dividend income that investors would have received from their local stocks.


While the local economy’s performance in the last three years has been anaemic at best, T&T stocks have performed well because there is a great deal of money chasing after relatively few high-quality shares. At a time when money held in savings accounts or in income mutual funds earns less than 1 per cent, there has been a particular affinity for high dividend-paying stocks. 
From what I can determine, in the same three-year period the increase in the value of the S&P 500, the US stock market index based on the market capitalisations of the 500 largest listed  companies, was about 46 per cent. This means that between the end of 2010 and the end of 2013, it would have been more profitable for the average local investor to have held a portfolio of T&T stocks than to have pursued the diversification that some analysts are promoting. It would be useful for those promoting diversification away from the local stock market to note that T&T citizens investing in the US stock market are required to pay a tax of 15 per cent on their qualified dividends and long term capital gains, whereas neither capital gains nor dividends are taxed in this jurisdiction.


While T&T stocks have outperformed most foreign stocks over the last three years, the more relevant issue for local investors is whether local stock will continue to outperform foreign stocks over the next three years. It can be argued that the answer to that question depends on the policy decisions taken by the Government in the next three years. If the Government continues to pursue a systematic programme of divestment of state-owned companies—which has been promoted in this space for close to ten years—there is no doubt in my mind that the local stock market will continue to outperform foreign stocks. The evidence of the impact of divestment on the returns of local investors can be demonstrated by the experience of the initial public offering (IPO) of shares in First Citizens, the majority state-owned commercial bank, which was listed on the local market in September. A middle-income local investor who spent $33,000 acquiring 1,500 First Citizens shares in September would have an investment that was worth $60,375 at the end of 2013. In addition, that local investor would be receiving a cheque for $1,635 at the end of this month, as the bank is paying out a dividend of $1.09 a share, based on its earnings for the year ending September 2013. If the Government were to follow through on the commitments made by Minister of Finance Larry Howai in the 2014 budget, there is no doubt that the average middle-income T&T investor would generate more gains by keeping their money onshore rather than taking it offshore, which is what a senior stockbroker advised this week. 


Just to refresh your recollection, this is what Mr Howai said in the budget presentation: “Our capital market policy for generating high levels of savings and for promoting the efficient allocation of those savings is an ongoing activity. “First, we will take steps as soon as it is appropriate to make an Initial Public Offer of a newly established company into which the National Gas Company of Trinidad and Tobago will transfer the 39.0 per cent shareholding in Phoenix Park Gas Processors Company Limited, which it is purchasing from ConocoPhillips. “Second, as soon as the technical work on the restructuring of the Home Mortgage Bank and the Trinidad and Tobago Mortgage Finance Company Limited is completed, we will make an IPO for the Trinidad and Tobago Mortgage Bank.” That means that for the average, local middle income investor, there would be at least two opportunities to make invesments in newly listed companies. And the minister did not even mention a possible second offering of shares in First Citizens or the tantalizing possibility that shares in Methanol Holdings (Trinidad) Ltd, the majority Clico-owned methanol producing company based in Point Lisas, could be sold on the local market this year.


Given the importance of MHTL and its Oman-based subsidiary MHIL—Clico’s 56 per cent stake in which is worth at least $12 billion—to the repayment of the $20 billion in taxpayers’ dollars that the Government spent in saving CL Financial, an update on the MHTL arbitration in London would have been most useful. Of course, an update on what is going to become of Clico’s traditional insurance portfolio, the Cabinet Note on the divestment of CL Financial’s assets and whether the Government intends to proceed with the establishment of Atrius would also have been welcome at the end of a year of increasing uncertainty on these issues. What would have been useful at this time, as well, would be if the Ministry of Finance were to issue a firm schedule of the IPOs so that local investors would be able to plan how they are disposing of their surplus capital in 2014. In the absence of a schedule, local investors are going to be pressured by brokers looking to shill foreign stocks for high commissions.


It would also be very useful if the Minister were to provide some more explanation of the four state enterprises that he said are going to be sold to private sector interests. According to Mr Howai: “There are a number of State Enterprises whose requirements for expanding trade and for securing specialist skills, technology and finance can be met by the private sector. Those enterprises with scale and technology intensive activities needing capital to expand would be exposed to strategic investors.  “To that end, Government has identified four state enterprises with commercial remits which operate under market conditions, have become mature and can now transition to another stage of development. “During the course of the coming year, we will begin the process of seeking strategic investors for: the Vehicle Maintenance Company of Trinidad and Tobago; the National Helicopter Services Limited; the National Flour Mills Limited (NFM); and the Point Lisas Industrial Port Development Corporation Limited (Plipdeco).” There is no doubt that the vehicle maintenance and the helicopter companies would benefit from being privatised. A strong argument can be made that the Government should insist that shares in those two companies should be offered to the investing public by the acquirers. Local investors already have the opportunity of purchasing shares in NFM and Plipdeco.


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