FINANCIAL NOTEBOOK ...Q&A with CMMB Securities

Q. I’ve read in this column something about saving US currency, but this is my situation. My brother living in the States has been sending money every month for me to put aside as he wants to build a house in Tobago. Should I convert to TT, keep it in US and where to put it?

Melanie, Trincity

A. Keep it in US dollars. Here’s why.
In the financial markets interest rates on stronger currencies are lower than those on weaker currencies. The higher rate on the weaker currency is compensation to investors for taking the risk of that currency depreciating. Therefore, under normal circumstances the interest rates on TT dollars are higher than those on US dollars as the TT dollar is weaker relative to the US currency. However, in Trinidad and Tobago at the present time the rates on TT and US dollars are very close such that the current interest rate spread between the two currencies is at an historic low. This situation is due to two factors :
1. the unusually high levels of TT dollar liquidity in the financial system
2. the current tightness in the market for US dollars which according to the Central Bank of Trinidad and Tobago was especially so during the first quarter of 2003.

Investors are therefore in a win-win situation. Normally by converting US to TT dollars to get a higher interest rate, the investor is faced with foreign exchange risk, that is, the possibility of the TT dollar depreciating against the US dollar. But because the difference in interest rates between the two currencies is currently small, an investor can keep his savings in US dollars and not sacrifice the return he gets. He therefore has the dual benefit of a good return in a currency which is relatively stronger whereas before he would have the trade off of a comparatively lower rate in US dollars. Deciding where to place your US funds depends on your view on interest rates. It may be better to keep your funds in a US dollar Money Market Account since the interest rate on such instruments move with market conditions. If the predictions do materialise then the rate of return on your funds would move up in line with the market.

Q. A friend of mine who works in a bank says when stock markets in the US or Europe take a dive and stay low for an extended period it can have a negative effect on my savings. If that’s true how does that work?

Leslie, Maraval

This depends on the characteristics of the instrument in which you are investing. If you are investing in a fixed income instrument such as a savings account, fixed deposit or money market account then there is no direct effect on your savings should there be a downturn in the US or European markets. However, if you are investing in an “income and growth” type fund then there is a possibility that this fund may have invested in the stock markets abroad. The amount that you lose from your investment in such an instrument would depend on the investment policy of the fund.

There are different types of income and growth funds. Some are conservative and invest a small percentage on the international stock markets while some aggressive growth funds can invest larger quantities. This is why it is important to read the prospectus of each fund to be very clear about the types of investments the portfolio manager is allowed to get into. During the Asian crisis such aggressive mutual funds lost a lot of money as stock markets all over the world tumbled. Therefore, you must determine whether you have the risk tolerance to invest in such funds. If you already have invested and the value of the fund has declined substantially, the best option may be for you to leave it there. The reason is that while stock markets are susceptible to crashes they have also shown some remarkable resilience and potential to rebound. Therefore, while the value of the shares may be below the price you paid for them, once you have the time to wait they most probably would go back up.

Q. Should I pay for tertiary education in cash or borrow from a financial institution?

Anesa, Tunapuna

There is a saying in finance and that is it is always better to use other people’s money. So if you can obtain a student loan from a financial institution then this would be better than drawing down your cash savings. Remember, as a student you may not have a source of income and as such your savings would be important in paying for living expenses, rent etc. Even though the interest rate could be high, the value of your savings to pay for necessities far exceeds that. Moreover, some student loans are structured where the payments are not due until after your period of study when you would have a job and be able to afford it. Make sure and shop around from a number of institutions to get the best deal and try to get unto the Government-subsidised facilities where the interest rate would be lower. Talk to your Student Advisory Services.

Questions can be sent to : PO Box, 1830, Wrightson Road, Port-of-Spain.
Email: cmmbsecurities@mycmmb. com