Review of the Local Equity Market

During the third quarter of the year the local equity market has proven the statement, "what goes up must come down." After a slow first quarter, local investors revelled in the rapid upsurge in the market during the second quarter as the Composite Index gained in excess of 15 per cent over the three months April to June. This run up was on account of investor speculation and mounting anticipation of the re-entrance of the cash proceeds of the RBTT/RBC deal into the local equity market. Prior to the pay off of RBTT shareholders, investors took positions in many of the core stocks in anticipation of a second upswing when the money entered the market.

The second phase of the upswing did not come to fruition however, as many investors opted to stay away from the equity market, whilst some chose to invest in short and long term debt instruments, with others opting for cash in US dollars. At the time of the cash injection into the system there were a number of bonds being issued, both by the government to mop up the excess liquidity as well as banks seeking to minimise the impact of deposit reserves.

The market began to correct in the third quarter of the year and closed on September 30 with a year to date return of 8.5 per cent, falling in excess of 11 per cent in just two short months. The All T&T Index experienced a much smaller decline of 3.9 per cent in the third quarter with a year to date return of 20.3 per cent. These declines were exacerbated by the fall in investor confidence and skepticism that ensued from the news of the struggling international capital markets.

As depicted in Table 1, although traded volumes and values declined in the third quarter as compared to the second quarter of the year, year to date traded volumes exceeded that of the same period of 2007.

The third quarter of the year can be characterised by a fall in activity level due to a lack of demand on the market, a deterioration in investor confidence, and a decline in the prices of many of the listed stocks on the market.

Leading the advances for the year thus far was Readymix Limited with a year to date capital appreciation of 350 per cent. Prestige Holdings Limited continued to be the worst performing stock on the local market down 34.8 per cent as the Group struggled with increasing costs.

The other regional economies namely Jamaica and Barbados have not been as fortunate as our local economy during this time of financial crisis in the international arena. Jamaica's heavy dependence on international economies for energy and food supplies has resulted in high inflation which the Bank of Jamaica now estimates could end the year as high as 17 per cent by the end of 2008. The Jamaican stock market has also suffered as a result with both the JSE Main Index and the All Jamaica Composite closing the third quarter in the red, down 5.5 per cent and 5.2 per cent respectively.

The Barbados economy has not been spared from this international struggle. Like many other Caribbean countries whose economies are dependent on tourism as a significant source of revenue, rough times are anticipated going forward for Barbados as the tourism sector is expected to decline. Economic growth for Barbados has also been revised downward by rating agency Standard & Poors for 2008 from 2.5 per cent to 1 per cent. The Barbados Local and the Barbados Composite recorded a year to date return as at September 30, 2008 of negative 0.8 per cent and positive 0.8 per cent respectively.

Market Outlook

On the local end, domestic GDP growth was recently revised downward in the Annual Budget presentation to 3.5 per cent by fiscal year end 2008. Internationally, the crisis of the financial sector has not had a direct and immediate effect on our local economy but has indeed had a psychological effect as it has dampened investor confidence in the equity market.

We hold the view that the market is set for further downside during the last three months of 2008 as low investor confidence and a lack of demand on the market persist. Market P/E multiples peaked at 14.5 times at mid year and have since decreased to 12.5 times at the end of the third quarter. If present multiples persist until the end of the year, the market should end the year up 5 per cent. If however this decelerating trend in valuations continue the Composite Index could close the year flat.

As the market continues to decline, valuations of some of the listed securities are becoming more attractive, presenting favourable buying opportunities for medium term investors. Neal & Massy Holdings Limited (NML) is trading at a trailing P/E multiple of 10.7 times versus a five year historical average of 13.2 times. Republic Bank Limited (RBL) is trading at a trailing P/E multiple of 11.8 times. Sagicor is trading at a 9.3 times multiple. Some stocks have returned or are on their way back down to their pre RBTT/RBC Amalgamation levels.

Recent market trends show large price movements on very thin volumes, signs of panic selling. Unlike many of the blue chip stocks on the international markets our local bellwether stocks have been reporting healthy results. For the first nine months of 2008, NML and RBL reported core earnings growth of 30 per cent and 25 per cent respectively while ANSA McAL Limited produced growth of 15 per cent at the end of the first half of the financial year. Feedback obtained from meetings held with a few of the locally listed companies however, suggests that present earnings growth rates will not be repeated in the new year.

Overarching suction of confidence in international markets has not been lost to local investors. However, the local financial impact from the fallout in the international capital markets will be felt before the economic effects. Statistics have shown that the local market is 18 per cent correlated with the international market suggesting that our market should not experience the same extent of volatility as that being experienced outside the region.

Some of our local stocks would be affected indirectly through exposure to Jamaica and other regional countries. These countries are expected to experience a slowdown in economic growth because of a decline in industries such as tourism and manufacturing. Companies with significant exposure to these countries may therefore be affected such as Guardian Holdings, Sagicor Financial and Trinidad Cement Limited to name a few.

The financial landscape has changed and investors have entered previously uncharted waters with no clear direction of where markets are headed. Investor confidence has dissipated and has been replaced by fear and uncertainty. Investors are advised not to panic during these turbulent times. Some of the locally listed companies remain fundamentally healthy. However, international pressures may continue to affect our local capital market in the short term. We continue to advise investors to remain calm in this most cataclysmic storm.