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September 4, 2018

September market memories create jitters, while Petrotrin Global Bonds trade at 16% yield.


US Market – 9-year Bull run continues!


United States and Canada NAFTA trade discussions were the focus of the market as at the end of August.  Mr. Trump wrote, “If we do not make a fair deal for the US after decades of abuse, Canada will be out.” The comment is a reminder of the risks to a possible deal ahead of the resumption of talks on Wednesday.  Mr. Trump negotiated a deal with Mexico to revamp NAFTA last week, it is still uncertain whether Canada will be in a position to join in. The uncertainty came amid differences over trade rules governing agriculture and specifically Canada’s protection of its dairy industry in addition to divisions on the regime surrounding trade and investment disputes.


On the other hand, in the US economy, consumers are increasingly referencing job and income security when asked to explain why they are buying vehicles and homes, and historical data show this trend usually picks up before a recession. Low interest rates and low inflation have continued to encourage economy-fueling consumer spending. Second-quarter growth climbed by 4.2%, the largest rate in more than four years.


Federal Reserve Board has raised interest rates twice this year in an attempt to slow down economic growth before the booming economy creates financially risky bubbles. Rising rates have been blamed previously for ending economic expansions. We expect at the next rate meeting at the end of September the Fed to increase the target short-term benchmark rate to 2.00% - 2.25%. This is up from 1.00%- 1.25% a year ago.


The Trump administration provided a stimulus to the economy when it passed the late-2017 tax cuts that put more money in consumers’ and businesses’ coffers. While at the same time, the government has ramped up spending on priorities like defense. High inflation rate due partly to increased tariffs, the main cause has been the expectation of robust economic growth. Analysts are confident that the economy will continue to grow robustly this year, however seem skeptical that the current pace of growth will continue into future years.


“We think the expansion has further room to run, but this development supports our concern that 2019 could be a precarious year for the economy as the impact of fiscal stimulus wanes while tariffs and trade-related uncertainty will likely to have a more material negative impact on activity than they have so far in 2018,”  as stated by Oren Klachkin, economist at Oxford Economics in a recent note.


The University of Michigan on Friday said its consumer sentiment index was 96.2 in August, up from an initial 95.3 reading published earlier last month. The current level is the lowest level since January. Rising prices and rising interest rates appeared to drive the recent downtick. Meanwhile, future income and employment confidence were cited by consumers as key reasons for their positive spending views on durable goods like homes and vehicles.


Europe – Brexit no-deal?

German business leaders have raised the alarm over the state of Brexit negotiations, they are urging the British government to soften its position ahead of make-or-break talks with Brussels this month.  “We have reached a critical phase. The time that remains is incredibly short,” Joachim Lang, the director-general of Germany’s BDI industry federation, told the Financial Times.  It appears that Britain is heading for a no-deal hard exit.  “If there is no agreement by mid-November, German companies will start implementing their emergency plans for a no-deal Brexit,” Mr Lang said. “In a no-deal scenario, and without a transition phase, we would end up with a border and customs regime that no one is prepared for. There would be considerable uncertainty, there would be interruptions to supply chains and the UK industrial base would take a hit.”  


A further sign that pressure is piling up on London, chief Brexit negotiator Michel Barnier said on Sunday that he was “strictly against the British proposal” on post-Brexit trade. Both Mattes and Lang made clear that German industry continued to support the negotiating stance of the European Commission, which has led the Brexit talks on the EU side and has been the target of intense criticism in the UK.  Prominent Brexit supporters have long voiced hope that German and European business leaders could put pressure on Brussels to offer the United Kingdom a more favorable Brexit deal.  There is a need to strengthen the European Union 27, as the 27-member group is concerned that other member states may leave once Brexit materialize.


Asia – China’s dismal year present good entry points.

China’s stock market gloomy year has foreign institutions offering more optimistic prospects for the country than local investors. Overseas money has poured into Chinese equities this year via a trading link with Hong Kong, despite a 16% decline in Shanghai stocks that has made it one of the world’s worst-performing major markets. However, trading volumes in Shanghai, which are driven mainly by retail investors, last week fell to their lowest level since January 2016 when the market was in the midst of an unprecedented crash. While, foreign buyers appear to be in search of potential bargains, local investors are worried by government attempts to rein in credit and a growing trade dispute with the United States. Confidence in stocks are fragile, despite official data showing the economy is still growing at more than 6% a year.


Foreign inflows were set to increase last week when index provider MSCI was to add to the weighting of stocks listed in mainland China in its widely followed Emerging Markets Index. Funds which track the index will then automatically have to buy more of the roughly 230 Chinese companies that were first included in May. Due to MSCI, foreign ownership of Chinese-listed stocks has risen to 3.5% of the market, up from 3% at the beginning of the year. Some $31 billion has flowed into China’s two main markets, in Shanghai and Shenzhen. That is insignificant when compared to China’s $7.4 trillion stock market, but still greater than the outside investments that entered during the 2017 calendar year.


In addition, China’s A Shares have presented good entry points. “Valuations had become stretched at the end of last year, but now there are more opportunities,” said Mr. Mattock, who manages the firm’s China strategy. He said he is looking in particular at companies making consumer goods, industrial stocks and the larger Chinese banks.


Emerging Markets


One of the bond market’s biggest investors has seen its flagship funds battered by the turmoil in emerging markets unleashed by Argentina’s worsening financial crisis. Franklin Templeton, the US investment group, have underlined how the crisis has wrongfooted many of the market’s best-known names and left investors wary of diving back in. This is despite talks on Tuesday between Buenos Aires and the IMF over a revised $50bn bailout package. 


Franklin Templeton funds have lost $1.23 billion in the past two weeks on just three of its biggest Argentina’s positions as reported by the Financial Times. Mr. Michael Hasenstab, Fund Manager who manages the Franklin Templeton flagship $36.8 billion Global Bond Fund lost 4.2 per cent in August, according to Bloomberg data, while his $5.4 billion Global Total Return Fund dropped 4.3 per cent, the worst month for both funds in nearly four years.


Regional Economies

The Government of Trinidad and Tobago announced closure of Petrotrin’s refinery operations have left many analysts in the grey. Trade unions, contractors, employees and lease operators would all directly be affected. 


The company’s history spans back collectively over 100 years, in the 1980’s production peaked at 360,000 barrels per day of oil, 2018 production levels have been around 40,000 barrels of oil per day. The future of the company appears to be in the Exploration and Production department where the company anticipates a marginal profit according to the Government estimates. New governance for the company, the export of crude and the import of fuel for local demand would now be required to “Reinvent Petrotrin”.

Outstanding debt of the company includes US$ 850 million 9.75% bond due in August 2019 and US$250 Million 6% May 2022 amortizing bond. The Petrotrin 2019 bond has an offer yield of around 16% with 3.4 million bonds exchanging owners as at the time of writing. 


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