Home' Trinidad and Tobago Guardian : January 9th 2014 Contents JANUARY 2014 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG17
The T&T stock market Com-
posite Index was up 11.27 per
cent for the year 2013. It gets
even better if you remove the
cross listed stocks and focus
primarily on the All T&T
Index. This index was up 17.67 per cent in
2013. Those who took the advice of over-
weighting stocks over bonds in 2013 would
have been well rewarded for their efforts.
Yet, while an 18 per cent return is nothing
to scoff at, it pales when compared to other
markets around the world. The country with
the best performing stock exchange in 2013
was Dubai in the United Arab Emirates, up
107.69 per cent. Argentina at 88.87 per cent,
and Abu Dhabi with 63 per cent rounds out
the top three in the world.
In fourth place and top of the developed
world in terms of stock market performance
was Japan at 56.72 per cent. What is currently
taking place in Japan is a huge experiment
that can easily set the tone for the rest of the
developed world in the years to come.
Much of the focus has been on the quan-
titative easing programme of the US
Federal Reserve where, up until last month,
they were purchasing financial assets from
the market to the tune of US$85 billion per
month. Over the past year and a bit, Japan
has engaged in a similar programme to the
tune of US$75 billion per month. When you
consider that the Japanese economy is one-
third the size of the United States, this rep-
resents a monetary easing programme on an
Such a programme has the impact of devalu-
ing the yen (Japanese currency) and since
much of Japanese business activity is tied to
exports and a falling currency represents a
boost to exports, a major salvo in the currency
war is at hand with the rise in the Japanese
stock market being the end result.
As you go down the list of top performing
markets, there is Pakistan, Nigeria and Bulgaria
at 49, 47 and 42 per cent, respectively. The
performance of the fifth and sixth place coun-
tries making the point that economic, political
and even social turmoil are not always directly
correlated to stock market performance.
After that comes Ireland with a return of
33.64 per cent and clear evidence that at least
one of the so called "PIGS" from the European
crisis has managed to get their act together
and is strongly on the road to recovery. Inci-
dentally, Greece is in tenth place with a return
of 28.06 per cent, the stock market in Spain
produced a return of 21.42 per cent and the
"P" in the acronym Portugal 15.60 per cent.
All double-digit returns despite the economic
uncertainty surrounding these countries. For
investors, the biggest lesson here is to avoid
the common mistake of focusing on the head-
lines. The reality is that stocks get beaten
down on account of various headlines and
fears in the market. When they get beaten
down it means that valuations are cheap and
regardless of what is going on around, a cheap
valuation is more than likely to generate out-
Of all the countries listed so far no investing
case was clear-cut. In fact, if you were asked
to predict the top performers at the start of
the year and the returns produced many if
not everyone would have been way off the
Japan was a beaten down market for 20
years and towards the end of 2012 it moved
around 20 per cent. The level of undervaluation
had to reverse and once the catalyst came the
market reacted, as it should. The same was
the case in Europe.
The bottom line in all of this was that the
accommodative central bank policy around
the world trumped the economic uncertainties.
Last year was the year that the markets firmly
concluded that it was futile to fight the respec-
tive central banks.
The US Fed
Nowhere was this more apparent than in
the United States. With the aforementioned
US Federal Reserve asset-purchasing program
providing unparalleled liquidity to the market
the US markets returned 29.6 per cent to come
in ninth in the global ranking of the best per-
forming stock markets.
Aside from the mantra of not trying to invest
against the tide fostered by the central bank
the lesson for investors from the performance
of the US markets is the importance of sen-
timent and how to manage even bad news so
that it has minimal effect on the physiology
of the market.
If one were to plot a chart of stock prices
versus economic growth expectations during
2013, the inverse correlation between the two
would be apparent. Forecasts for economic
growth were continually revised downward
during the course of the year and with it came
a rise in the stock market as there was a lower
hurdle from which to exceed expectations.
Factor in as well the increase in share buy-
backs and it is easy to see why the market did
as well as it did.
With interest rates still at record lows, many
companies went to market to borrow at very
low interest rates. Those funds were then used
to repurchase shares, which reduced the num-
ber of shares in issue and hence increased the
earnings per share. This naturally lead to a
higher share price and in the case of a company
like Apple they borrowed money despite hold-
ing on to as much of 10 percent of the total
cash held by corporations in the US.
2013 was therefore the year that exuberance
took hold and the market climbed on the back
of many factors, however strong corporate
fundamentals was not one of the pillars of the
For those who remained fixated on fixed
income during 2013 this should prove to be
scant consolation as the signs of an equity
rally were apparent at the start of the year
and for all intents and purposes those investors
who remained wired to fear and the need for
safety and guarantees missed an opportunity
of a lifetime.
The last time the US market performed as
it did in 2013 was in 1997. Investment lesson,
focus on what is before you as opposed to
what has passed by for that is already priced
into the market.
Let me stress though that at this stage while
it can be classed as exuberant there is nothing
irrational about the moves in so much as it
has been engineered and supported by central
To underscore the point about not investing
to last year s news simply reflect on the per-
formance of Europe which was in 2012 every-
one s favourite catastrophe just waiting to
happen. Germany was up 25.48 per cent,
France 18 per cent, and England 14.43 per
cent. To round out some of the developed
markets Canada was up 9.55 per cent.
Obviously, there must be markets that per-
formed below expectations and down markets
in a year and 2013 was no different. Everyone s
favourite investing region over the past decade
was the BRICs but out of the four countries
that make up this bloc only India generated
a positive return at 8.98 per cent. Russia,
China and Brazil were all down 5.55, 6.75 and
15.50 per cent, respectively. The much-touted
Singapore market was flat at 0.01 per cent.
Overall the market losers were all from the
emerging markets and in particular in Latin
America. Mexico was down marginally at -
2.24 per cent, but Columbia, Jamaica, Chile,
Brazil and Peru made up five of the bottom
six with returns of negative 11.18, 12.59, 14.00,
15.50 and 23.63 per cent, respectively.
The big issue here in the emerging markets
and, especially in the Latin countries, is how
to engineer the next phase of economic growth.
I wrote about the "middle income gap" during
the course of last year and this is in my view
what is in play today.
There were economic reforms that put these
countries on a growth part leading to a level
of prosperity. Now these economies are at an
inflection point and this is reflected in the
stock market performance.
The question that needs to be answered is
whether these countries have the political will
to engineer the next set of reforms to move
their economies forward or whether they will
resort to more populist measures that will roll
back some of the progress made during the
last two decades.
Here at home we can attest first hand that
populist measures are temporary at best and
are inimical to the long-term sustainably of
As developed economies continue to attract
more of the global liquidity, the economic
fundamentals of the emerging market countries
will become more of a factor in terms of how
they perform going forward.
All in all, appreciate from the markets men-
tioned here that it is futile to try to time when
to enter a market.
More often than not you will get it wrong
and miss the move. The lesson is to always
It sets the stage for this year and this rep-
resents an interesting dynamic and one, which
we will explore in more detail next week.
Ian Narine is a broker registered with the
Securities and Exchange Commission.
Lessons from the past...
The 2013 review
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