Q& A with CMMB Securities

Q.   Some insurance agents have told me that their products are great ways to invest because I can get a tax break. But I have also been told never to use a tax concession as a reason to choose an investment. Which advice is  correct?

Anjanie, Couva

A : It depends on the situation. Generally, it is always advisable to invest in an instrument on which you derive the greatest tax efficiency. For example, it is always prudent to capitalize on the tax deductions afforded to individuals of up to $12,000 per year for investment in annuities. Similarly, investing in residential property would reduce your taxable income up to $18,000 per year. Most insurance agents market products which capitalize on these allowances on your tax return. So if it is specifically tailored to these allowances then by all means proceed. However, when it comes to assessing the return earned on one investment when compared to another of different risk, taxation should be a secondary consideration. Investing in an instrument which is riskier than another, only because there is a tax break, may not be the wisest thing to do. When choosing between investments, the first principle is to assess the risks involved and only after you have chosen the investments suitable to your particular risk tolerance should the tax treatment be considered.

Q.   How can I invest directly in the U.S. and U.K. stock markets?

Kavita, Valsayn

A : In order to invest in these markets you would have to approach a broker.  There are a few options which can be considered. You can arrange for a broker in Trinidad and Tobago to purchase the shares.  While the broker in Trinidad would not have a seat on the exchange the shares can be purchased through a broker abroad. Going through this route may or may not be expensive depending on the relationship which exists between the  intermediating broker and the broker overseas. Alternatively, you may want to open an account directly with a broker in the US or UK. This would be subject to certain requirements by the broker which may have to be fulfilled. Depending on their assessments, the posting of different degrees of margin (a percentage of the value of shares being purchased) may be necessary. There are also brokerage houses available on the Internet which you may be able to access once the relevant requirements are fulfilled. Talk to a broker in Trinidad and Tobago or check the web and shop around to get the best deal possible.

Incidentally, now may not be a wise time to get into these markets. Due to  deflation in the global economy markets abroad may be going down a bit further, before going back up. As mentioned in a previous column the local market has been performing phenomenally better than markets overseas.

Q.   I’ve heard that a good time to buy shares in the stock market is when prices are low. Right now the local market seems to be moving very high, does that mean it’s not a good time to be buying?

Samuel, Felicity

A : Fundamentally, the price of any share is related to the company’s earnings potential. The logic is that the higher the profitability, the greater is the possible dividend payout. There has been a significant rally in the local market since November last year due to the low interest rates and rebound in confidence after the last election which broke the 18-18 gridlock. Therefore prices have risen to a significant degree. This is not to say that the prices of shares are overvalued and there are going to be corrections. It can be said though that the market has reached a point of relative flattening when compared to the previous months. However, given the growth outlook for the economy and the earnings forecasts for a few of the companies on the exchange, further price growth may be in the offing once the respective financial accounts are published. Therefore, now may be a good time to get into the market, but in particular sectors which are expected to do well this year. Talk to your stockbroker to get an idea of some of the companies whose share prices are likely to go up.