Choking the market

Former stockbroker Peter Clarke believes the stock market will take some time before it gets the bear off its back and feels that that restrictions placed on institutional investors continue to drag it into the doldrums.

“ I do not believe that the market has begun a sustainable turnaround,” he said in a wide-ranging interview last week.

“What we saw in May was a recovery in certain shares that had been badly hit because of investors fears. Those shares such as RBTT, Guardian and NFM rebounded to more reasonable price levels,” he said in response to a question on whether the market had finally corrected itself.

Companies are still turning in profits, albiet lower than a year before. So are shareholders becoming obsessed with the share prices ?

Investors, he noted, have to be concerned with the rate of profit growth but while there have been some good results such as Ansa McAl, Scotia and CCN, the former WISE (West Indies Stock Broker) CEO said there have also been disappointments such as Guardian, RBTT, and TCL.

Clarke, now a financial consultant, said many other companies have produced moderate growth in profits and investors expected a better performance. “When you consider that the economy is booming, I think most investors would have expected a better overall picture,” he said.

“This,” he said, “then raises the question of the valuation of some shares particularly in the context of what are those companies future profit growth prospects.”

Despite strong economic growth, the Trinidad and Tobago stock exchange continued its downward trend during the first quarter of the year.

Both the All TT Index and the Composite Index fell by 11.5 percent and 10.2 recent, respectively. While rising interest rates and a market readjustment are reasons advanced for the downturn in the stock market, these might not be the only explanations, according to the Republic Bank newsletter, June 2006.

The opportunities available to institutional investors and individuals in the international stock and financial markets have become increasingly attractive, offering greater options for portfolio diversification,” it reasoned.

Both domestic market indices (All TT Index and Composite Price Index) demonstrated poor performance.

“It is partly this pattern in the returns on financial assets that has led some investors to move investments away from domestic assets into foreign currency denominated assets,”

Still, the domestic stock market began to show some signs of improvement in early May with both market indices recording positive growth.

GHL chairnam Arthur Lock Jack has sought to ally the fears of stock holders that their fears of their stock falling further is unfounded. Asked about this, Clarke still held faith in the company. “

“I think GHL is a solid company,” he said. “Their earnings are extremely volatile largely because of the manner in which they account for their shareholding in RBTT. I am confident that the share price will recover over time.”

He is of the view though that the introduction of electronic trading made the market more volatile and dismisses the argument that its introduction had anything to do with the fall in share price.

“Those who want to blame it for the decline in prices conveniently forget that in the first seven weeks of electronic trading the market surged,” he said of electronic trading.

“What electronic trading does,” he said, “ is allow supply and demand to be matched a lot faster than in the old manual system.”

Both Lok Jack and Stock Exchange chairman Andrew Mc Eachrane have argued that the restrictions placed on institutional investors have had a negative impact on the market. Clarke, asked what impact this was having and what can the regulators should do about it, was adamant that restrictions placed on institutional investors was depressing the market.

“The 50% restriction under the Insurance Act on institutional investors is the single most important factor in the decline of the market, which started in May 2005.”

“ Until the institutional investors are able to re-enter the market or significant new buyers such as foreign investors are found, the market will be unable to sustain a rebound.

Market pundits always point to the cyclical nature of the market but will prices ever go back up to what they were a year ago ? Can shareholders expect to see such returns again ?

Clarke said his advice to shareholders now was to look for opportunities.

“If you look at individual companies rather than the market there are always opportunities. Look at Guardian at $17.00 and NFM at 64 cents. The key is to do your homework and not just jump on someone else’s bandwagon.”

“Once earnings continue to grow and the economy remains buoyant the market will recover over time.