Letter from the managing director:

Story Created: Dec 29, 2013 at 9:23 PM ECT

Story Updated: Dec 29, 2013 at 9:23 PM ECT

Dear Investor,

As we say goodbye to quite an eventful 2013, in all aspects really, we at Bourse reflect on the year gone by while looking forward to 2014 with measured investment optimism. Driven primarily by loose monetary policy and so-called ‘quantitative easing’ (QE), the developed world enjoyed stronger financial market performance despite continued anaemic economic growth over the past twelve months. In contrast, emerging markets (EM)—while experiencing stronger economic growth—endured a mixed bag in terms of their financial markets. Concerns of economic overheating, social unrest and the impact of tapering all contributed to muted performance in these regions which have bolstered world economic growth in recent times. Locally, economic prospects continue to improve, despite the Trinidad and Tobago financial system experiencing persistent excess liquidity amid historically low interest rates.

The year 2014 will offer investors the opportunity to build wealth across both the local and international markets. The developed world seems set to emerge from its state of anaemia, with global growth projected by the IMF to increase from 2.9 per cent in 2013 to 3.6 per cent in 2014. Developed financial markets are likely to remain bullish in the coming year, particularly in the U.S. The US Federal Reserve’s tapering start date of January 2014 suggests that the world’s largest economy is firmly on the road to recovery. Material risks will inevitably arise as markets adjust to changing policies of global central banks, event and political risks, as well as patches of soft economic data. Although US market indices are at all-time highs, concerns still persist for emerging markets, particularly with tapering.

For the Trinidad and Tobago investor, the clear concerns must be that:

(i) the local equity market is trading near an

all-time high over the past decade. The

market is trading at a P/E of 19 times

against its 10-year average of 15 times.

The question arises as to whether

valuations can be sustained at this level

going forward.

(ii) local interest rates are at historically

low levels. Traditionally, TT dollar rates

have been at a premium over equivalent

US Dollar interest rates. This has been an

essential policy initiative so as to mitigate

pressures on the TT currency.

We now have a situation of negative real rates of return in the Trinidad and Tobago market as annual inflation levels exceed medium-term interest rates. This interest rate story goes across the board. In this context, we suggest four (4) investment themes for 2014.

These are as follows.

2014 Themes for the Trinidad and Tobago Investor

1. Target Positive Inflation Adjusted

Returns

2. Lengthen your Investment Horizon

3. Diversify across Currencies

4. Diversify across Asset Classes

Target Positive Inflation Adjusted Returns

Yields on the local TTD market provide generally lower returns when compared to annual inflation levels. Even at historically low levels, headline inflation in Trinidad and Tobago in November stood at 4.4 per cent while the corresponding yield on a local government 10-year bond stands at 2.5 per cent. This provides investors with a negative real return of 1.9 per cent on their investments. As a first order of business, investors should focus on extending their investment holdings away from short-term investments such as deposits and money market funds, yielding in the range of 0.25 per cent to 1.20 per cent, towards longer maturing holdings such as bonds which would provide higher yields. Even so, inflation is still eroding your wealth held in TT Dollar fixed income securities. By comparison, on the international market, the current US inflation rate stands at 1.2 per cent while the yield on the recently issued US dollar Government of Trinidad and Tobago bond is 4.04 per cent. This offers investors a significant real return, in USD terms, of 2.82 per cent.

Lengthen your Investment Horizon

The moral of the story then, is not only to lengthen your investment horizon but also to look beyond our shores for fixed income investment opportunities. Indeed, the recent upturn in USD bond yields as a result of the US Federal Reserve intentions to taper its bond purchases in January 2014 has created investment opportunities for investors with the capacity to invest internationally.

We at Bourse continue to find that investment grade USD emerging market corporate bonds in the 5 to 10 year space offer investors significant yield pickup over similarly tenured local bonds. That is to say, an investor can benefit from extending his/her investment horizon to the medium-term and adopting a hold-to-maturity approach. Investors who may also be concerned about a possible depreciation of the TT dollar will find this alternative attractive as a wealth preservation strategy. Adopting a hold-to-maturity approach with bonds and lengthening the time to maturity will accrue benefits of higher yields/ returns with an appropriate level of risk.

Diversify across Currencies

As a currency hedging strategy, investing in foreign currencies such as the US dollar can reduce the overall risk to your portfolio. In the same way diversification by sector/country reduces the chance of significant losses should an unexpected event affect a particular market, spreading risk by currency further improves the diversification of your portfolio. This can be done through investing in USD mutual funds or directly into specific equities/bonds.

Diversifying across Asset Classes

Diversifying your portfolio by asset class and by geographic region increasingly makes sense. By holding less stock/bond-specific portfolios and moving more towards a portfolio representative of the market(s), you retain the benefit of market advances while reducing the risk exposure to any particular stock/bond. We emphasise that investors should consider equity or bond mutual funds offering broad market exposure as a substitute for selecting their own stocks or as an enhancement to their existing stock portfolio.

Investors should also consider diversifying by geographical regions beyond T&T/Caribbean and into regions such as US, Europe, Latin America, Asia etc. The less-than-perfect relationship between different markets translates to more balanced returns in the medium term. A clearer example of the benefits to diversifying by geographic regions can be seen in the performance of the Trinidad and Tobago Composite Index (TTCI) and the S&P 500 Index. The compounded annual growth rate of the TTCI when compared to the S&P 500 showed that the S&P 500 was almost double that of the TTCI with returns of 28 per cent and 27 per cent over a 1 and 5 year time frame respectively. Despite the negative returns recorded in the 1 and 3-year periods, the emerging markets recorded a 5-yr compounded annual growth rate of 21 per cent.

This further supports our overarching theme of diversification, in this case by region.

As the dust settles on another exciting year in the financial markets, we at Bourse remain committed to working with you, our investors, over the next year to enhance your portfolio returns. We would like to take this opportunity to wish the entire investing community a bright and prosperous 2014, filled with good health, happiness and investing success.

For more information on these and other investment themes, feel free to contact Bourse Securities Limited, at 628-9100, email us at Research@boursefinancial.com or visit us at any one of our three offices located in Port-of-Spain, Chaguanas and San Fernando. Investors can also visit our website at www.bourseinvestment.com or Bourse Securities Limited Facebook page.