Money Matters: Firstline Securities Blog

Currency Devaluation and its Likely Economic Effects – 101

4 February 2016

What is a currency devaluation?

The first thing to recognise is that a devaluation of a currency relative to other currencies only happens in a system where a fixed floating rate or a centrally managed floating rate exists. In the Republic of Trinidad and Tobago, we are essentially referring to a managed floating rate (this is often referred to in economic parlance as a “dirty-float”.

A devaluation – or for that matter a revaluation- amounts to an official change in the value of a country’s currency relative to all other international currencies under either a fixed or managed exchange rate system. This can be compared to a pure and automatic floating rate system where changes in the currency rate through either appreciation or depreciation occur automatically as a consequence of the interaction of the supply and demand for that currency.

Why do countries devalue their currencies?

When a central government takes a decision to devalue its currency under a fixed or managed float, it is often because economic events have made the current exchange rate effectively “indefensible”.

To understand this, one needs to understand that a fixed or managed float has to be defended.

In order to sustain a particular exchange rate, a country must have at its disposal a sufficient level of foreign exchange reserves (in the case of Trinidad and Tobago this means a sufficient supply of United States Dollars as this is by far Trinidad and Tobago’s largest trading partner) and the willingness to use them if necessary to purchase all offers of its currency at the established or managed rate of exchange.

In the event that a country is either unwilling (a recent example would be China) or unable (Venezuela) to maintain the current exchange rate, then a decision has to be taken to devalue its currency to a level that it is able (through the existence of enough foreign reserves) and willing to support. Read more…

Recession: Is It Such A Bad Thing?

1 February 2016

The inspiration for this piece came from my hairdresser visit over the weekend. Our female readers would know what a Saturday at the hairdresser is like…yep, an all-day outing, engaged in conversation and dryer sharing. To be out of there by midday you’d have to be one of the first to arrive.

Anyhoot, the thing is; this Saturday was much different. I arrived, equipped with my own reading material and everything, but was pleasantly surprised to find an idling wash attendant and just three other ladies, all part-way through their service. Needless to say, I quickly gave salutations and hopped across to the sink.

“Oh yes, I can definitely get used to this recession thing!” exclaimed one lady who was paying for her service. Only 10 am and she was already on her way out.

Her statement kept me thinking throughout my wash and dry: can you really benefit from a recession? Can a citizen truly be okay while the country on the whole is hurting?  Isn’t belt tightening supposed to be uncomfortable? Read more…

Foreign Investment Part Two

14 December 2015

Foreign Investment – Part Two

The world really is your Investment Oyster…

In the first blog entry in this series we looked at the potential benefits of investing overseas in various classes of assets. In this entry we look at some of the other factors you should consider before making such an investment.

What are the risks involved in making international investments?

Whichever way you look at it investing overseas carries the same general underlying risks associated with making an investment in the domestic market of Trinidad and Tobago (these are the risks specific to the asset that you are making an investment in).
Over and above this there are other risks that you need to take into account when considering making an overseas investment that are not generally applicable when you make an investment in your own domestic market. Although the following should not be considered to be an exhaustive list, you would certainly have to consider some (and perhaps in many cases all) of the following:

  • The political, economic, and regulatory risk associated with the investment – all international investments are subject to risks that are specific to the country that investment is located in. As an overseas investor, you need to carefully monitor those risks on a continuous basis. You need to consider whether you have the time and expertise to do this.
  • The currency risk associated with the investment – If you make an investment in (as an example) a Brazilian company then you will have to invest in that company using Brazilian Reals. When the company pays a return – either in the form of a dividend or perhaps interest – they will pay that return in Brazilian Reals, which you will then need to convert into Trinidad and Tobago dollars. This means that in our particular example you are exposed to the risk of movements in the exchange rate between the Brazilian Real and the Trinidad and Tobago dollar.
  • Problems involved with the selling of the asset – if you hold an overseas investment, it can take longer to sell that investment if you need to “cash out” in a hurry. This is because some countries restrict the amount or type of securities that an overseas investor can purchase and sell. If such restrictions exist in your market, then they can make it significantly harder to buy and sell overseas assets.
  • Additional or “hidden costs” – as a general rule of thumb investing overseas can be more expensive than investing in the domestic market. Each country is different – and this point alone highlights the importance of doing research upfront – but many impose withholding taxes on the payment of dividends and interest to overseas investors. The best advice we can give here is always consider the tax implications of your investment (covered briefly below).
  • Sourcing accurate and up-to date information on potential investments – with the rapid extension of internet availability and the existence of services such as Google Finance and Bloomberg this is perhaps less of an issue than it was five years ago. Most companies now provide investor relations sections on their individual websites and most overseas stock exchanges contain detailed information that can be used by the investor for research purposes. Usually this information is prepared in a timely fashion.
  • Access to legal remedies in the event that an investment goes bad – in the event that your overseas investment goes “bad” and you have to resort to legal remedies, you are left with the unenviable prospect of seeking a remedy through a foreign court. Seeking such a remedy is often a timely and costly process with no guarantee of success.

 

 

'Could you bring in that list of risk factors you downloaded yesterday?'

 

 

 

 

 

 

 

 

 

 

 

These additional risks alone make it important for you to consider your options when making an overseas investment. If in doubt the best option is always to seek professional advice before making any decision that places at least a part of your capital at risk.

How do you conduct research on a potential international investment?

Before making any investment (local or foreign) it always wise to conduct some research before-hand. As discussed above your research should be focused on the country that you intend to invest in, the political and supervisory environment applicable in that country, and any laws applicable to non-nationals making investments from overseas in that country.
There are many sources that you can use to perform this research depending at least in part on your sophistication as an investor but again the best option is often to seek professional advice.

  • Financial advisor and broker reports – if you are considering making an investment through an overseas broker, then consider looking at any research material that they may provide on their websites. Many advisors and stock brokers provide a wealth of research material and reading it will certainly assist you in keeping up to date. Don’t forget that we at Firstline maintain a blog, and it is possible to surf historical entries covering all types of topics of interest to the person considering an overseas investment.
  • Foreign company reports – if you are considering investing in a listed overseas company, listed companies are as a general rule of thumb often required to maintain reports and make these available to investors. If you need help translating these reports into English, then consider seeking help at the local embassy for the country that you have invested in as a first step.
  • Foreign stock exchanges and other regulators – often the stock exchange and regulator existing in the country that you want to make an investment in provides information on potential investments, and this is usually free to use for the potential overseas investor.
  • International bodies – international bodies such as the IMF and World Bank produce regular reports on the economies of different countries. These can be used for research into the general macro-economic conditions applicable in a target investments country.
  • Google Finance and the web in general – the web is often a great source for researching investments but care should always be taken to corroborate information from more than one reliable source, and as always be careful of anyone who is trying to or appears to be trying to “sell you something”.
  • And for the super sophisticated investor – Bloomberg is perhaps the best resource for researching information available on the planet. If your portfolio is large and your pockets deep, consider acquiring one.

What are the tax impacts of making international investments?

When making an overseas investment always take appropriate advice from your tax advisor. However, as a general rule consider that individuals who are resident in Trinidad and Tobago are subject to income tax on their worldwide income, irrespective of whether that income is repatriated to Trinidad and Tobago. Also consider that some overseas territories impose withholding taxes on the payment of dividends and interest to non-resident individuals and corporations.

Closing thoughts – a time to chill and a time to invest?

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

Foreign Investment Part One

9 December 2015

Foreign Investment Part One

 

 The man who looks only inwards misses a whole world of opportunity…

 Is it time to look overseas?

On the 4th December 2015 the Central Bank of the Republic of Trinidad and Tobago issued a monetary policy announcement.

Apart from increasing the repo rate by a further 25 basis points to 43/4 % (the eighth consecutive increase in the rate) the Central Bank made a significant statement on the future prospects of the economy of Trinidad and Tobago. For the record this is what the Central Bank said:

“Trinidad and Tobago’s growth prospects remain subdued amid weak business and consumer confidence. Following a dismal first half of 2015, domestic economic activity was depressed in the third quarter of 2015. The MPC was of the opinion that similar weak economic conditions are so far prevailing into the fourth quarter of 2015. Given the performance in the first nine months of the year and the potentially dimmed prospects for the final quarter, the domestic economy is expected to register an overall decline in 2015.”

This begs the question: is it time to look overseas for investment opportunities for at least a part of your investment portfolio? Read more…

Thought of the Day

25 November 2015

What is happening with Petroleum Co. of Trinidad & Tobago?

Thought 4 2DAY Picture

 

 

 

 

 

 

 

 

 

Downgraded To ‘BB’ From ‘BB+’ On Lower Commodity Price Assumptions; Outlook Stable (see report attached).

S&P Downgrades Petrotrin on Lower Commodity Price Assumptions

— Following the downward revision of our oil and natural gas price deck
assumptions, we believe Trinidad and Tobago-based oil and gas company
Petrotrin’s financial metrics will weaken more than originally expected during
the next 12-18 months.
— We are lowering the corporate credit rating on Petrotrin to ‘BB’ from
‘BB+’. At the same time, we are revising the stand-alone credit profile (SACP)
on the company to ‘b-‘ from ‘b’.
— The stable outlook reflects our expectation for ongoing and
extraordinary government support if needed, an improvement in Petrotrin’s
refinery operations, and higher oil prices in the next few years.

Read more…

Money Laundering and Anti Money Laundering 101

17 November 2015

What exactly is Money Laundering – time to add some Breeze?

Look for a simple definition of money laundering in a textbook on Financial Impropriety (I searched on Amazon and surprisingly no one has written such a textbook yet) and you would almost certainly come up with something along the following lines:

“Money laundering is the process by which the illegal nature of criminal proceeds is concealed or disguised in order to make it appear as if the proceeds had been derived from a legitimate source.”

Money laundering can therefore encompass a wide range of situations rising from involvement with the proceeds of any criminal activity through to the extreme of processes designed to obscure the original provenance of funds used to finance terrorist activities.

Somewhere captured within the spectrum of this definition would be concealing bribes and other inducements. In other words – Politicians and Business Executives are often also guilty of laundering money – in an effort to hide their ill-gotten financial gains.

In short, money laundering isn’t just a phenomenon linked purely to drug trafficking. It happens across the world in both developed and under-developed economies. It is therefore endemic.

Money laundering is very much also a “White-Collar” and an “Ordinary Man” problem. Obviously this has serious implications if you are a financial institution (like a credit union or a bank), but it has implications for other businesses too.

Imagine if someone walked into a new car dealer and tried to buy a car with a suitcase full of cash. Should the dealer’s suspicions be raised or should he take the cash and run literally straight to the bank? This scenario may seem fanciful but it does happen! Read more…

A Business Reminder: Actively Manage Your Risk

12 November 2015

Yeah, yeah, yeah, you say. Firstline, tell me something I don’t know!

Ok, grasshoppers. Let’s set the scene with a story first…

About BP

Tony Hayward had experienced a long and successful career at BP. His rise up the ranks was nothing short of meteoric. In September 2000, he was appointed BP’s group treasurer and his responsibilities included global treasury operations, foreign exchange dealing, corporate finance, project finance, and mergers and acquisitions. Hayward became an Executive Vice-President in April 2002, and Chief Executive of Exploration and Production in January 2003.

Looking at this from a slightly different angle and focusing on his early career highlights, we can surmise that Tony Hayward knew all about the concept of risk.

Therefore, in 2007 when BP appointed Tony Hayward as their Chief Executive Officer, it is not surprising to note that he made safety his top priority. Accordingly, he instituted a wide range of requirements, even including that all employees use lids on coffee cups while walking, and refrain from texting while driving. These rules were applicable worldwide to all companies under the BP group umbrella.

All the rules Tony Hayward instituted were sensible ones really.

Three years later on the 20th April 2010, the Deepwater Horizon Oil rig exploded in the Gulf of Mexico causing one of the worst man-made disasters in history. Boom! Read more…

Investment Risk – It’s What Makes the World Go Around…

5 October 2015

What’s the standard definition of investment risk?

Look for a standard definition of investment risk and you may find a definition that reads something like this:

“Investment risk is the chance that an investment‘s actual return will be different from that which was expected (broadly referred to as volatility of the investment). It also includes the possibility of losing at least part, and in some severe cases, all of the investor’s original capital sum. “

More often than not this textbook definition of “investment risk” is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment (measured against the market as a whole).

Making very complex maths simple, a high standard deviation indicates a high degree of risk. Applying the text book definition the comparative volatility of an investment is a large part of what investment risk is.

What is investment risk really?

Focusing on the volatility of an investment by measuring its standard deviation (or Beta) against the market perhaps clouds the issue of what investment risk really is.

Sometimes it is better to keep things simple. Read more…

Thought of the Day

28 September 2015

It seems as though the Fed is lining up those ducks in order to raise those rates by year end. Federal Reserve Chair Janet Yellen said she is ready to raise interest rates this year and intends to let the labour market run hot for a time to heal the lingering scars of the worst recession since the Great Depression.

                                                                                                                                  unnamed (1)                  

“Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year,”  said madam chair as she delivered a speech last evening  in Amherst, Massachusetts.

So, when the FED raises those rates, what is going to happen? Will the bull market stumble, bond yields climb across the curve or merely flatten, and will the economy slide into a recession? It has been 74 months and counting whereas the competing record stands at 35 months.

Are we really ready for this hike? If not how do you ready yourself for a much anticipated move like this?

For bonds what I can say is that it has been pretty volatile as the market looks forward to the rate hike and looking very similar to what you see happening with equities.

The major difference is that the impact of the hike may happen faster in bonds than stocks when the Fed changes course in policy. Interestingly, in office talk our portfolio manager Osmond here at FSL thinks that markets have already adapted to Fed policy expectations and as such any hike is already priced in.

Is the World Economy Anywhere Near a Meaningful Recovery?

8 September 2015

Is the world economy stuck in first gear?

In the most recent assessment of the prospects for the world economy Moody’s predicts the world is on course for muted growth for the remainder of 2015 and 2016.

Looking purely at the numbers, Moody’s forecasts that GDP growth for the G20 block will slow to around 2.7% in 2015 (less than the 2.9% achieved in 2014), and will only moderately increase to 3% in 2016.

Effectively it appears that the world economy cannot get out of first gear.

What should we expect in terms of oil prices?

On the back of recent events Moody’s has revised downwards its estimation of oil prices following sharp falls in recent months and continued evidence that supply continues to outpace demand.

oil price fall

 

 

 

 

 

 

Accordingly Moody’s expects Brent crude to average $57 a barrel in 2016 which is slightly higher than the average for 2015 (at the time of writing of this entry that average for 2015 stood at $55 a barrel).

Comparing current trends with the position last summer, the price of Brent Crude has fallen by more than 50% from its peak price of $115 per barrel last summer.

That’s great news for economies that depend on oil imports but not particularly good news for oil producers like Trinidad and Tobago. Read more…

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