EP: 18 - Investing for the long term.

First, it’s important to remember why interest rates can go up.  Typically, interest rates are going to rise when you start to see signs of inflation; when the economy is strong from an employment or from a growth perspective and Central Banks then decide that we don’t need as much stimulus in the form of low interest rates; so in a way, it can be good news that interest rates are going up.  

At the same time, interest rates going up can present their own risks – both to the economy and to stocks, and it can present opportunities to the economy and to stocks.  If the main reason that rates are rising is because growth conditions are strong so that low rates are not needed anymore, that’s actually a good news story. It usually means that we have good conditions for cyclicals, business that benefit from improvements in the economy. Higher rates can also be helpful for the net interest margins that banks earn on many of their loans. 

On the other hand, if the main reason that interest rates are rising is because inflation is running hot and central bankers are afraid of inflation, that’s a little different. That can be a little more of a threat to the economy, but tends to be beneficial for energy or mining stocks; stocks in the commodity complex, as the value of those commodities can rise and certainly, that can have a positive impact on something like energy as you would have heard about earlier. 

Irrespective of which reason rates are rising; low rates have tended to be good for high growth businesses because they have high growth far head into the future; and when rates are low and people are not earning much on their bonds, people are more willing to pay up for that long distance future growth and so the price-to-earnings multiples of those businesses have really gone up quite a bit.  It is possible that if interest rates go up a lot, people will be less willing to reach out years and years and years for that growth and some of those businesses may see a bit of a contraction in their price-to-earnings multiple.  

Meanwhile, business that have lower or reasonable price-to-earnings multiple (things like banks or commodity companies) could see a relative benefit; the group that is traditionally known as “the value bucket” of markets.  

The key thing from our perspective is to build portfolios that have a balance of exposures, so you have some businesses that benefit from high rates, some businesses that benefit from low rates; and for individual investors, an asset allocation is recommended that you can be comfortable with and stay invested for the long term. 

The answer to that, to a degree is – you don’t know.  There’s a very old saying in the markets that “they don’t ring a bell at the top of the market.”  They don’t really ring a bell at the bottom of the market, either. It’s a bit more art than science, but you can look for signs, and you can try to evaluate that for yourself. First is that, markets are not cheap in valuation. It’d be difficult to make an argument that they represent a complete bargain, here.  They may be very fairly priced and given where bond yields are, it’s possible that they’re a relatively attractive investment, but stock markets have certainly recovered very strongly from their pandemic lows. We’re arguably late in the cycle; it makes sense that that may be the case. 

Next, I’d say look around in the market – do you see signs of speculation or fervour or people who are just very interested in markets and things that they think will allow them to make money very quickly, drawing your attention here to cryptocurrency or whatever you may think about that; or some of the stocks that are becoming popular among retail investors on internet forms, including Reddit – a website where people have really gathered and tried to pick an individual stocks and sort of push it higher.  These tend to be the kind of signs that I remember from the ‘dot com’ era – that suggests there’s a bit more greed than fear in the markets right now, despite this pandemic that we’re going through.  

At the same time, it makes sense that investors are putting money into equities given the low yields of what you can get on bonds, what you can get on cash, stocks that pay you a dividend – where that dividend grows; there’s a argument to be made there that that plays a very important role in your long-term asset allocation.  One of the things mentioned that is both good news and bad news is, corrections are normal.  They’re very normal. On average, if you go back 50 or 100 years, most years, there’s a 5% correction, even 10% corrects are very common and one even deeper than that won’t entirely be surprising. They’re very hard to time and it’s very difficult to say, “well there’s about to be a correction so I’m not going to put money in the market, or I think there will be a correction so I’ll wait and I’ll put it in at the bottom.”  That’s very tricky and it's generally recommended instead to make an allocation that you’re comfortable with; don’t worry about that euphoria too much; be aware of it, but set your allocation and sleep on it.

Energy companies are going to invest where there’s the best opportunity for return, and right now Guyana with its sizeable recent oil discoveries is going to attract a lot of attention and investment from all corners. There aren’t a lot of new oil discoveries in virgin territories like there’s been in Guyana, so the opportunity for the multinational energy firms in hard to ignore. 

Guyana, as Trinidad has in the past, would encourage these companies to invest in their local economy, by say localizing some support services, to reap maximum benefit to the country from the uptick in activity, and so we may see the multinationals present here continue to redeploy resources from Trinidad, a more mature energy market which now requires less capital outlay with a lot of infrastructure already in place, to Guyana, that’s just going about setting its industry up. That being said, Guyana represents huge opportunity for Trinidadian energy an energy service companies to capture a piece of that pie. As a close neighbour with over 100 years experience in the energy sector, and many knowledgeable professionals in both energy and its supporting industries, Guyana can definitely benefit from our expertise. 

We’re also seeing that local companies can likewise invest in Guyana to the benefit of local shareholders, just as we recently saw FCB purchase Scotiabank Guyana’s operations, and see local property developers undertaking new projects over there. Where we can now export or knowledge and capital, it can be mutually beneficial to both Trinidad and Guyana.  

Property tax is not something new.  It’s something that’s experienced in most markets in the world and what we used to have in Trinidad up to a few years ago.  It was suspended, not terminated. Most people have an inherent, bad view of taxes.  What it will do to some companies, that is - companies that have large physical footprints, owners of properties on the ground here – it will represent an additional expense right off the bat to them.  

From a broader standpoint to the economy, what an additional revenue can mean to the government, in terms of developing the economy with the digital thrust and infrastructure development, the additional resource that they’ll have at their disposal to then do that – will be significant, and that can be a positive move overall. It may actually help with the allocation of resource; we do know that people tend to hold on to properties for a long time and not use them – you may see  a lot of vacant prime properties in certain places; having a property tax is a cost, so it’s going to make people really evaluate if that property is really worth it to them; are they going to actively invest in that property – in developing it, getting tenants, utilizing it from commercial or residential activity; or are they going to pass it off to somebody who will? 

Attaching a small cost to ownership of a property will help redistribute resources more efficiently and allocate resources more effectively in the economy so that the persons who own these properties will make the best use of them and that will be in everyone’s best interest.  While it may be an expense to certain companies, overall, it can have a positive impact on the economy.  

It's not very likely over the coming couple of years.  In the presentation we shared, we see that T&T is not in a horrible place. We’ve been through the worst of it over the last couple years with the shutdowns, etc.  With vaccinations ongoing, we don’t expect the government to revert again to lockdowns having already seen their negative effect on fiscal position of the country.  

We have good international reserves; we have over $7B or 8.7 months of import cover; as well as the country is also investment grade rated, we’re BBB- supported by the strong fiscal buffers we have, coupled with the economic growth we expect with increased energy production and higher energy prices over the coming 12 months. 

When we look at the countries in the Caribbean who have been to the IMF, recently Barbados and Jamaica in years gone by, they were in much worse fiscal positions at those points in time than we are in here today. We’ve been through the worst, and we should expect that we will be better off in the coming 12 months so there shouldn’t be a need to resort to the IMF in the short term. 

It can be really difficult to tell how long a correction will last, or when one will take place.  It depends on both the reason for the correction, and the reason for the rebound, as we saw during the COVID-19, which was one of the sharpest and deepest drops on record followed by the steepest ascension. 

A suitable strategy for someone sitting on cash might be to increase equity exposure partially over time into the correction, perhaps deploying increasing capital at intervals of a set percentage down in the market each time; that way acquiring more stock at lower prices as the decline continues. This way, you won't completely miss the move down waiting to pick a market bottom, if the market rebounds quickly, but you will also not completely expend your capital at the first leg down. 

A correction is defined as a 10% drop, while a bear market is defined as a 20%. COVID-19 was an approximate 40% drop within weeks. For someone already invested, depending on their risk tolerance and objective, it might be a good strategy to add exposure similar to as above, or for a long term investor who can afford to, could even be best to ignore the move all together. If you didn’t move a muscle last year,  you still ended the year up 16%, which is above the market’s long term average. Or if you blinked and sold on the way down, and were waiting to get back in, you could have missed the upside all together. 

Commodities are notoriously volatile as we have seen, with oil moving from -US$35 a barrel to now US$75 a barrel; while neither move would have been confidently predicted a few months prior. A direct way to play the cycle might be futures contracts for the various commodities, while a less direct and less volatile way might be via investing in companies that provide services to the various sectors/subsectors. 

You can buy a gold bullion contract, or gold miners’ stock, or crude futures, or a diversified energy company’s stock like Exxon, or even XLE the energy sector ETF. They’ll each be correlated, but one will move much more acutely with the commodity price than the other. The preferred investment would depending on your personal investment objective and risk tolerance. Greater risk would bring the greater potential return, with stress on the word potential.