THE effects of COVID-19, coupled with the sharp decline in energy prices are being felt across capital markets worldwide, with stock markets and bond yields plunging to all-time lows. Faced with quarantines and supply disruptions, many companies are feeling the brunt with widespread store closures. Indeed, several international brands are already projecting that sales and profit forecasts for Q1 2020 will be missed.
Against the backdrop of rising recessionary fears globally, there has been coordinated policy responses by several central banks to step up efforts to shore up their respective economies. The US Federal Reserve and the Bank of England both cut their key short-term interest rate, the European Central indicated their intentions to increase bond purchases by €120 billion (US$134.8 billion) while the Bank of Japan pledged to double stock purchases and help companies to get loans.
Locally, the domestic stock market has so far not been impacted by the ripple effect of the wider collapse in equity prices. Unlike the US equity sectors that are posting double digit declines year to date, locally only the Manufacturing I, Non-Banking Finance Sector and Energy sectors experienced sharp declines of 9.55 per cent, 10.50 per cent and 38.61 per cent respectively. The Conglomerates, Manufacturing II and Banking sectors were down modestly, with losses ranging between 0.05 per cent and 5.32 per cent. The Property and Trading Sectors are still posting gains, with returns of 2.78 per cent and 0.03 per cent year to date respectively.
Even though the impact on locally listed companies has been limited thus far, this is likely to change rapidly if the rate of infection continues to rise, in which case, we expect the financial performance of the local companies to be impacted in the near term.
Banking Sector and
Non-Banking Finance Sectors
The banking sector – the largest sector on the Trinidad and Tobago Stock Exchange (TTSE) based on market capitalization, can be impacted in a variety of ways – including reduced borrowing and lending activity, increased loan provisioning and lower gains on investment portfolios.
Individuals who may be affected by the virus or impacted by the circumstance and require time off from work, may encounter difficulty in meeting loan obligations as income may be impacted, or in an extreme case, jobs may be lost. Similarly, small and medium sized companies may experience a falloff in sales given the measures taken by the authorities to curb the infection rate. Faced with such a reduction in income and/ or sales and in extreme cases no job, delinquency rates are likely to rise and demand for credit may slow. In an effort to shore up their loan portfolios, financial institutions may opt to be more prudent and implement a more stringent lending criteria, thereby increasing the level of loan provisioning and curbing lending activity.
Most financial institutions and companies in the non-banking finance sector maintain large investment portfolios that generate non-interest income. Financial institutions with exposure to international securities, especially in the equity market may potentially incur losses due to the volatility and sharp price declines, thereby moderating income levels.
The local conglomerates are engaged in a variety of businesses, including distribution and manufacturing, retail services, automobile sales and energy services. With several international companies experiencing shocks to their supply chains, local distributors and manufactures may encounter challenges sourcing products and raw materials, directly impacting sales. Such companies may also face higher prices due to shortages on the global markets, with the increased cost being passed down to consumers.
Conglomerates with exposure to the automobile industry may also be impacted. Following production shutdowns at many Chinese plants, car manufacturers who source various components from China are currently experiencing disruptions in supply chains. Such interruptions may be translated into reduced or delayed car shipments for some automobile dealerships and thus lower sales.
The energy sector is expected to perform in tandem with international energy prices. As such, as energy prices remain depressed due to weak demand, continued oversupply and the price war between Saudi Arabia and Russia, the financial performance of the energy sector may be tempered.
If a vaccine is produced and the spread of the virus is contained over the short-term, the economic impact may be tempered given the synchronised accommodative monetary and fiscal stance adopted by many governments. However, if the vaccine implementation is prolonged and the rate of infection and death continues to rise, major supply disruptions and global recessionary pressures may emerge. Consequently, we can expect the share prices of domestic companies to trend lower in the near future.
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