Q&A with CMMB Securities

Q: Can small companies apply to be listed on the T and T Stock Exchange, or is it reserved for the big firms?

Rupert, Sangre Grande

A: There are certain requirements which the regulators have put in place for listing. Nonetheless, the rules have been structured in a way as to actually encourage those small companies fitting the criteria to list on the exchange. Even though these companies can list most have chosen not to do so. There are a few reasons for this. Firstly, the cost of equity is higher than the cost of debt due to the fact that interest rates have fallen drastically over the past two years. Limited Liability companies with good banking relationships can access short-term funds at significantly low rates of financing.

Secondly, the interest paid by companies on bank loans is tax deductible and so reduces the effective tax rates. Dividends on a company’s stock are paid after profits are declared and so do not provide a tax shield that interest on debt does. Thirdly, many companies, especially family businesses, prefer not to have their financial information out for public consumption. For as you know, in listing a company on the exchange financial statements must be published periodically. Fourthly, a number of family firms are afraid of losing control of their businesses to investors who accumulate large portions of their shares and must be given directorships. There are numerous stories of businesses that benefited from the financing on stock markets worldwide but later went into decline, as the new majority shareholders were unable to cooperate in deciding the future of the company. Lastly, small companies are always keenly aware of the risk of takeover from large conglomerates. So while there are benefits to listing there are drawbacks as well. However, there are ways of structuring a share issue to reduce some of the pitfalls involved. Any business owner contemplating listing should talk to a qualified investment banker for professional advice.

Q: In your columns you stress that in the world of investment past performance is no indication of future gains. So then why do financial institutions always have big advertisements telling us about interest figures in previous years?

Alana, Oropouche

A: It is not that past returns are never indicators of future gains. The fact is the past is, in some cases, quite a good indicator of the future. However, there are other cases where the past would not be a good predictor of the future. It is up to an astute analyst to be able to determine when a trend would continue into the future or whether it may suddenly shift away from past patterns. For example, the performance of the Trinidad & Tobago stock market has been tremendous over the past five years. Given the expected growth of the economy, driven by the energy sector, this trend is expected to continue into the future. But, if the price of oil suddenly starts to decline, due to structural changes in the oil market, the robust performance of the market may not continue.

Similarly, with the coming on stream of electronic trading on the TT Stock Exchange, the significant rallies in stock prices witnessed over the past few years may not continue. So it is not that the past is not an indicator of the future. In the short-term it may be quite a good indicator. However in the long term, as the structure of markets change, the underlying price dynamics can be significantly altered. When one sees advertisements showing past returns this should be interpreted as only a guide to what is expected in the future. In short, nothing can replace the advice of an experienced financial analyst.

Q: I read in the papers that a leading banker believes interest rates could get lower before the end of the year. What would that mean for my savings, which I have in two separate money market accounts?

Stacey, Carapichaima

A: One of the main factors which determines interest rates on TT dollars is the amount of liquidity in the local financial system. At present, there is excess liquidity and economists speculate that this will continue to expand in the near future. Therefore, the consensus is that interest rates would continue to fall and as such this downward trend will affect all money market accounts. However, this decline would have differing impacts on various financial institutions. This in turn would result in different rates being offered for money market funds. For example, if an institution has been able to capitalize on high yielding securities in the past, then it will be able to offer its clients a higher interest rate on their investments, as opposed to those companies which were not able to do so.

With respect to interest rates on US dollars, the situation would be slightly different. Despite the fact that rates on US dollars are soft on the international market, rates on US dollars in Trinidad and Tobago could be increasing due to intermittent shortages of US liquidity on the money market. So while TT rates may continue to trend down it is quite possible that US rates may go up or down depending on the level of international reserves which the Central Bank has to supplement US dollar shortages. Currently the price of oil is high and has been so for some time. So it is highly probable that rates on US dollars could trend down. However, if the price of oil begins to fall later in the year there is a possibility that rates can start trending back up, all things remaining constant.

All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever. CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.