Home' Trinidad and Tobago Guardian : February 22nd 2015 Contents FEBRUARY 22 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
NEWS | SBG5
Is financial repression pushing
portfolio holders to the brink?
stances. He said that creating viable returns required
the intervention of the Central Bank and a change to its
policy of prioritising foreign exchange allocation for
imports, to one of allowing US dollars to made available
for investment purposes as well.
As of writing this article, the rate of inflation as men-
tioned in the Central Bank s monetary policy announce-
ment of January 30, was 81/2 per cent (headline inflation).
Meanwhile, the return on GORTT bonds averages around
three per cent.
Below is Narine s e-mailed response to the outlook for
local investors who want to know how best to allocate
their assets and construct portfolios that bring the best
returns under the current circumstances.
independent financial consultant:
It means that in order to generate a real rate of
return, investors have to seek other assets. Bear
in mind that the safest investment are those issued
by the Government of T&T denominated in TT
In an unsophisticated market, where investors are typ-
ically risk averse, investors are left with two perilous
alternatives. Either invest in government paper and earn
a rate of return below that of inflation with the implication
that upon maturity you will likely be able to purchase
less goods and services with the sum of money that you
would have been able to purchase today, or, seek out
The problem with seeking out riskier investments is
that many times investors do not have the risk tolerance
for, or the understanding of how, to manage those invest-
ments. This can lead to difficult financial circumstances.
Situations such as these also open the door for all types
of schemes that may not be in an investors best interest
yet, they find themselves, gravitating towards these
"opportunities" in search of yield.
With over 10 years of financial repression and a rapidly
ageing population, T&T is facing a crisis down the road.
For reference, appreciate that the rate on a 10-year Gov-
ernment of T&T bond is under three per cent while the
rate of inflation is moving from five to eight per cent.
So our problem is not just that interest rates are low,
it is also the fact that they are below the rate of infla-
In this environment, many investors have sought to
invest in stocks, especially stocks of companies with a
high dividend payout ratio. This is seen the local stock
market rise over the past few years.
However, the size of our market is limited in the context
of the amount of liquidity that is created each year and
so there is a natural limit as to how high the market can
go without causing dislocations as happened back in
It is quite likely that the local stock market is approaching
the point where valuations are becoming stretched so
once again investors have to seek other options.
Real estate has always been a challenge from an invest-
ment perspective as it requires significant capital outlays
and, unless one is extremely wealthy, calls for very con-
centrated position. In a rising interest rate environment
and one where economic activity is likely to slow on
account, it also carries a fair amount of risk.
While each of these assets, bonds, stocks and real estate
carry different challenges, an investor should seek to
maintain some level of exposure to each asset class, with
the degree of exposure depending on the stage in life and
the financial goals associated with the investment.
Outside of T&T assets, I would always recommend
some US dollar (USD) exposure for an investment portfolio.
Over the long term, any dysfunction related to the inter-
action of local interest rates and local inflation will even-
tually be reflected in the currency exchange rate. Invest-
ments in USD can therefore provide a hedge against the
issue of financial repression in a T&T context.
Further, given our economy s reliance on oil and gas,
it is prudent to hold US dollar denominated assets in a
portfolio. This is because firstly, oil and gas prices tend
to fall when the USD is strong and secondly when oil
and gas prices are low, T&T dollar (TTD) assets linked
to the T&T economy will, all other things being equal,
become challenged. A portfolio that includes USD assets
provides a hedge against any downturns on the TT side.
While there are many asset allocation strategies that
investors can consider in terms of the mix of stock, bonds
and real estate, it is extremely difficult to develop a proper
portfolio in TTD because of the lack of investment oppor-
tunities available. Many have resorted to mutual funds
to fill the gap, but they generally face the same issues.
An analysis of the same type of mutual fund across
different service providers will reveal that the funds hold
basically the same types of assets. The only difference
is the brand name and how it is marketed.
That means that the investor is not really diversified
by investing in the same type of mutual fund across
To achieve real diversification in an investment portfolio,
one needs to look for assets outside of T&T.
However, accessing USD for portfolio investment pur-
poses is extremely difficult as the Central Bank of T&T
has, from inception, put such requests as the lowest
priority item on the queue.
The implications of this policy are not apparent today
but, as the society ages and financial repression continues,
the population s inability to fund their retirement needs
will become apparent and then it will too much to do
with no time available to act.
While we lament the lack of investment opportunities
in our energy sector, a reality that should be addressed
by the Phoenix Park IPO, local investors, by and large,
have also been unable to participate in the spectacular
success of the global technology sector by investing in
companies like Apple or Google because the access to
USD for such purposes is virtually non existent.
Beyond that, is the fact that 10,000 people in the US
are retiring every day and this trend will continue at the
same rate for at least another 19 years.
This speaks to huge opportunities in healthcare stocks
and businesses targeted to retirees and the over 55 lifestyle.
Yet, exploiting such an obvious trend is beyond the reach
of the average person in T&T as the vehicles to invest
in TTD are non existent and the access to USD is the
The end result is that local investors have been forced
to more or less disregard investment theory related to
asset allocation and essentially hope for the best.
Even in the unlikely event that they are able to acquire
a stable TTD portfolio of stocks, bonds and real estate
in the required mix, lack of liquidity in the market means
that it is near impossible to rebalance a portfolio over
time to take account of either changes to the market or
your investment circumstances.
Local investors have been forced to more or less disregard investment
theory related to asset allocation and essentially hope for the best.
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