The Caribbean’s newest stock exchange, the Eastern Caribbean Securities Exchange, should be trading by September. It will serve some of the world’s smallest economies — the eight islands that use the services of the Eastern Caribbean Central Bank. But it plans to set big-country operating standards right from the start.
The exchange will be all-electronic, with no physical trading floor; a sensible decision for a small and scattered market. And this will be perhaps the world’s first T+1 operation, with shares paid for and changing hands the day after they are traded.
One of the world’s smartest exchanges, it will also be one of the smallest. There are already 28 public companies in the OECS (Organisation of Eastern Caribbean States) region, not a huge total, but comparable to the 16 listed in the Bahamas or the 20 in Barbados, and half of them want an early listing. There are also plans to list regional government securities, once the necessary legislation is in place.
The English-speaking Caribbean already has four stock exchanges: Trinidad and Tobago, Jamaica, Barbados, and, since 2000, the Bahamas. There is an exchange in Suriname, and proposals for one in Guyana, though that country currently has only eight public companies.
But is a series of small regional exchanges the way to go? Perhaps not. The number of listed companies remains obstinately small. Trinidad and Tobago had 30 in early 2001, up from 27 in 1995, but still below the 1988 total of 34. Potential players are reluctant to list, often because they are unwilling to publish their annual results, or dilute the control of an individual entrepreneur or a close-knit family. Bank finance, not the equity market, is the most common source of new capital.
Trading volumes on each exchange are low. With few shares on offer, a buy and hold strategy makes sense for most investors. The new Bahamas International Stock Exchange has perhaps 20 trades a day, says chief executive Gerry Ritchie. Barbadians complain that small trades in a thin market can distort reported prices below real values. In Trinidad and Tobago, trading volume has fallen from 12% of market capitalisation in 1995 to 3% last year.
Professionals regret Caribbean fragmentation. Says Wayne Iton, general manager of the Jamaica Stock Exchange: “If we were starting today, we would not go for a model of four or five national exchanges.”
As far back as 1988, Michael Manley proposed a single Caribbean stock exchange. There has been, it is true, some progress. Cross-border trading started in 1991, but dropped off badly after an initial flurry of activity. Nine regional companies are listed on two or more regional exchanges, but companies such as Royal Bank of Trinidad and Tobago appear to be disappointed with the results of cross-listing.
Most investors still have a strong home-country bias. They know their own companies and their own economy. But there is more to it than that. Currency risk is one problem — the Jamaican dollar lost 20% of its US$ value between January 1999 and the end of 2000.
Economies and stock prices don’t move in parallel. The Jamaican market soared in 1992, then fell sharply. Trinidad was one of the world’s strongest performers in 1995-97.
Jamaica has used astronomical interest rates to shore up the local currency. Treasury bills have sometimes earned around 30%, and were still earning 17.8% in April 2001, virtually risk-free. That draws investor cash away from equities, and leaves even strong local companies such as Grace Kennedy with price-earnings ratios of below 6.0. Trinidad companies with similar earnings may have a share price two or three times as high. But cross-listing does not generate sufficient trading volume to bring convergence.
Cross-listed shares often have widely differing values on regional exchanges. In theory, a share that trades at Bds$1 should change hands for close to TT$3.1, or J$22. Not in practice. There’s not even enough market integration for traders to take advantage of arbitrage opportunities when a gap opens up.
Peter Boos, executive chairman of Ernst and Young Caribbean, thinks it’s time to put some heat into regional stock exchange integration. Along with the Caribbean Association of Industry and Commerce and the Trinidad and Tobago Chamber, Ernst and Young launched an integration initiative in April this year. Enthusiasts have a name ready, Caribbean Regional Exchange for Stocks and Securities, CaRESS for short.
The regional stock exchanges were established when governments and central banks thought in terms of self-contained national economies. Exchange control regulations blocked inward and outward investment flows. A stock exchange, however tiny, allowed local companies to draw on local savings. And citizens of a newly-independent democracy — customers, employees, other investors — could buy shares either directly or through their pension funds, taking a stake in companies that were traditionally controlled by a tiny elite.
Trinidad, Jamaica and Guyana no longer have exchange control, and limits on outward investment flows in Barbados and the OECS economies are no longer a serious restriction for most investors. All regional economies welcome inward investment.
For much of the Caribbean middle class, it’s now easy to invest online in overseas equities. With cable TV and the internet, information flows much more readily on companies listed in New York, London or Toronto than on trans-Caribbean stocks, or even companies in the investor’s home country.
As always, the flow need not be one-way. There may be potential overseas investor interest in Caribbean companies, some of it from Caribbean nationals living overseas, for whom a big local name still means something. Grace Kennedy’s Financial Director Don Wehby says that the company decided two years ago to investigate a listing on the NASDAQ exchange in New York. This meant hard work. Company accounts now meet the GAAP standard that is used in the United States, with more stringent disclosure requirements than before, a change which, arguably, benefits the local stakeholders as well as potential North American investors. Unfortunately, this programme was completed at just the wrong time for jumping into the NASDAQ, but if Grace does decide to list in New York, completing the remaining formalities should take only a matter of months.
But for most, a Caribbean exchange is the immediate objective. With electronic trading and depository systems, that can mean a computer, not a physical trading floor. Where to put it? St Kitts, perhaps, suggests Roger Cave of the Barbados-based Fortress Mutual Fund. “The Eastern Caribbean Securities Exchange is building a superhighway, but only for cars with OECS plates, and with a 30 mile-an-hour speed limit. We should ask them to drop the E from their name, open the highway to cars with plates from around the region, and put the speed limit at 80.”
