By Ken Chua
Originally published in MoneySense, Jan-Feb 2010
Nowadays, Celine (not her real name), a relationship manager for a private bank in the Philippines, is all smiles when talking to her clients. Her smile reflects their sentiments, who just a year ago, were also hit by the prevailing market conditions. After all, no amount of wealth can shield her high net worth clients from the financial crisis. And seeing the value of their investments, reaching tens of millions, dropped substantially is extremely disheartening.
“Being a private banker is not just about meeting my target but it is also about helping my clients maximize their gains,” Celine adds. But what gains could have there been last year when even good news seem to come short?
Heading into the last quarter of 2008, the scenario couldn’t have been gloomier. The sub-prime crisis that erupted the year before ended with the Lehman Brothers filing for Chapter 11 and AIG being bailed out by the United States government. Albeit frightening, it is not surprising to see the Dow Jones Industrial Average fell more than 500 points on certain nights. Investors have even surrendered to the fate of an ominous depression. The global financial markets were on the brink of a meltdown prompting people to believe that 2009 would not be any better if not worse. Economist would go on to predict an L-shaped economy, meaning no recovery in sight.
Come 2009, it would seem that the forecast would hold true when Chrysler and General Motors, two of the BIG three U.S. automobile companies filed for bankruptcy. Several months into the year, things were just turning from bad to worse.
But just when the proverbial light at the end of the tunnel is nowhere to be seen, the monetary and fiscal policies of different central banks such as rate cuts, capital infusions and guaranteeing bank deposits started taking effect en route to an economic recovery.
According to a report from the Hang Seng Investment Services - “In the recent G20 Summit, leaders agreed to further enhance cooperation in boosting global economy and would not step out of any stimulus plans before a sustainable recovery is warranted.” Clearly, all the stimulus packages that were implemented last year, had a positive note on the global economy and everything that was broken is currently being fixed.
Leading the pack of the recovery is China. The report adds, “China plays a critical role in reshaping the global economic outlook with its strong and efficient stimulus measures launched this year. The 4 trillion package as well as the 8.2 trillion new bank loans have successfully restored market confidence on China’s economic development.”
China’s GDP jumped to 8.9% in the third quarter validating the monetary policies that the Chinese government has been implementing since last year and is well on track to reach the full year target of 8.0%
During the past couple of months, the Shanghai Composite index rallied 104%to a high of 3,462 from 1,700 established in November of last year before correcting 20% to just slightly above 3000. Despite investors saying it was just a bear market rally, analyst believed that the correction was healthy and much needed.
Not to be outdone, the S&P 500 staged its own rally by surging 14% year-to-date and 41% for the past six months after hitting the trough. This phenomenon is brought about by the better-than-expected earnings performance for the second quarter of 2009 reflecting improved macroeconomic indicators.
Naturally, the rest of the world followed suit with Japan, the largest economy next to the United States rallied 14% year-to-date. The rest of the regional markets were not left behind: Hang Seng Index (+43%), Taiwan Stock Exchange (+61%), Straight Times Index (+45%) and Australian Stock Exchange (+27%).
Not to be outdone, our own Philippine Composite Index also boasted its own rally hitting an 18-month high just after the second quarter. This happened after the cash peaked last March, a sign that the market is ready to make a turnaround.
True enough, the rally brought the index to the 2,900-level and seemed poised to breached the psychological resistance of 3,000. This level marked an impressive 56% year-to-date performance and a 29% year-on-year return. Trough to peak marked an unprecedented 74% gain. Daily volume and value turnover also increased by 98% and 133% to 2.2 million shares and Php4.5 billion respectively, according to the BSP’s second quarter report.
True to the forecast of the analysts, the Philippines did not enter a recession (technically as recession is defined as two quarters of negative growth) allaying all fears and even posted a growth of 1.5% for the second quarter of 2009. Inflation also slowed this year to just 0.7% in September compared to the 11% a year ago. Gross International Reserves (GIR) has once again established a record high of $41 billion dollars.
With the indicators ending on positive notes, it seems that the Philippines has indeed proven resilient to the financial crisis.
Onwards and Upwards to 2010?
Now begs the question: Can these rallies be sustainable until 2010? Somewhere along, investors believe that markets will and should correct. That is healthy. But after witnessing what transpired last 2008, with corrections turning into crashes, investors are not sure if they do want to see one. At least not before the index reach its highs again and they recoup all their losses.
While the consensus among analysts and fund managers is that this crisis is not yet over, is there any reason then to be hopeful and be bullish at all? Alijeffty Gonzales, a Registered Financial Planner and business development consultant for Insular Life Assurance Company thinks so. “Let’s go back to some fundamentals. Interest rates are still historically very low. When you talk about the correlation of fixed-income and equities, a low interest environment is always good for the equities.”
Currently, the interest rate stands at 4.0% as opposed to the 0.25% Fed Fund rate and with inflation still below one percent, it is unlikely that the Central Bank will hike the rate in the near future. “There is bias towards equities because interest rates will not go up anytime soon,” he confirms. Fund managers report that it will only be in the first or second quarter of 2010 that the Central Bank will start hiking interest rate by only 25bps.
The local stock market is once again under the radar of foreign fund managers. Foreign buying is up Php 15.7 billion the end of June. Although the equities are not considered “cheap” anymore, it still presents a good valuation with 14-15x price-to-earnings ratio.
With 2010 being an election year, Gonzales feels that the growth will be broad base but singles out consumer stocks next year that can benefit a lot from the event. This is because of the added liquidity in the market that happens during election year. “Fast turnaround consumer goods will benefit from the liquidity,” he further adds.
But for those who are still afraid of volatility or not familiar with investing in the stock market, corporate bonds present a great alternative for bank deposits. The demand for these fixed-income instruments is very evident from the oversubscriptions of the past offerings. Currently the Php3.2 trillion pesos earn only a mere 2-3% per annum, a far cry from the 7-9% these bonds offer.
With much expansion going on because of the low cost of doing business, expect more offerings next year and expect them to be oversubscribed as well.
Other assets as alternatives
Real estate should be another viable investment come 2010. According to Richard Laneda, a research analyst, residential properties will see a better turnaround next year. “The drop in sales in properties is just a result of drop in confidence; people did not actually lose so much money. So as the world economy seeks stabilization, confidence will gradually return.”
With the Real Estate Investment Trust (REIT) law expected to be pass this year, the property sector should indeed excite the real estate and even the stock market investors. A Real Estate Investment Trust is a corporation comprising of only income generating assets, like malls and office buildings. REITs have to payout at least 90% of distributable income.
“Investors buying a REIT should look at the yield which is the amount of income you get for every peso you pay,” explains Laneda. “REIT is basically income generating asset, you buy it for the yield and not for growth. It is good as it may be an alternative investment for bonds,” he further adds.
Another asset class to watch keenly is the commodities. “The bias towards commodities has something to do with the inflationary fear brought about by low interest rate,” explains Gonzales.
Commodities have long been traditionally seen as a hedge against inflation. By hedging, it lessens or mitigates the loss of purchasing power brought about by inflation because commodity prices also rise along with inflation thereby increasing in value when other asset classes are depreciating.
The most popular of it is gold. Gold has headlined once again into the financial environment when it breached the $1,000.00 dollar per ounce. Although debates have not been scarce on whether the value is the ceiling or a new floor, fundamentals will show that allocating a portion to gold may not be such a bad investment decision.
When interest rates are high, gold prices go down. But when interest rates are low, gold prices go up just like now. Dollar deposits are earning negative return after subtracting inflation. And with the Federal Reserve likely maintaining interest rates at their current level, gold may find itself breaching resistance after resistance.
To put things in better perspective, in 1970s, the gold is valued at $35 dollars an ounce. Both cash and gold can buy the same amount of goods and services. But because of inflation from then until now, the $35 dollars certainly is not what it used to be. Gold price on the other hand, has increased by 2,700%!
Bullish on emerging markets
With global economy recovering from one of the world’s worst financial crises in history, investing opportunities are not limited to just the Philippines.
“As most major economies are still in the recessionary stage, it would be good to focus some of our attention on prospects in emerging countries such as Hong Kong, China, India, Brazil, Russia and Eastern Europe”, explains Jacque Dinglasan-Atilano, marketing director for Global Investor’s Center, Philippines.
The Bombay Sensex, Brazil Bovespa Stock Index and Russian RTS Index have so far gained 74%, 64%, 127% respectively.
Amongst these markets, Atilano emphasized on China because of its fast growing economy and Brazil due to the rising commodity prices given that its economy is heavily linked with commodities like coffee, soybeans and iron ore. On the other hand, regions like Russia and Eastern Europe are receiving positive growth due to the increasing prices of oil which stands at $79 dollars per barrel as of October 2009
While individual can do the investing on their own through international brokers, it may be wise to invest in managed funds instead. It will make investing easier since you are leaving the job of managing your money to the experts. Through managed funds, investors can participate in the growth of the emerging markets. A 10-15% of the investible fund spread in regular intervals is the most ideal strategy to utilize in exposure to international markets.
The not-so-rosy side of the coin
While 2010 presents lucrative investment opportunities, there is still a caveat to all of these. Just like any other year, there are also risks to consider.
First and foremost is the tightening of monetary policies. The third largest economy may already be signifying such intention after it rallied the global economy out of recession. Too much liquidity and easy credit can create an asset bubble which can result to a hard landing.
Although still premature, analysts are already forecasting a rate hike by China in the first quarter of 2010 and increasing reserve requirements to sap excess liquidity off the market.
Other central banks are also hinting at implementing such strategies next year. What the world wants to avoid now is a “double-dip” with the global economy dipping lower in 2010 or 2011.
The 2010 bull-run may be also be dampen by political risks. Former President Joseph 
Estrada has already announced his presidential candidacy with Makati Mayor Jejomar Binay as his running-mate. Although the Supreme Court hasn’t ruled anything in favor or against Estrada, expect the controversies to be hotter as election comes nearer.
Poll automation presents a quick and effective method but its reliability will be fully tested next year. As early as now, some lawmakers are already hinting of a possible transition government in case there is a failure of election due to system glitches and malfunctions.
The recent deluge of typhoons that has wrecked havoc in Metro Manila and Northern Luzon is also a risk worth considering. Analysts have already downgraded the country’s fourth quarter GDP to 1.2% and a full year target of 1.4% from a high of 1.9%.
The cumulative damages of the big three: Ondoy, Pepeng and Ramil can go as high as 38 billion pesos in infrastructures and farmlands.
With tax breaks being given for those affected by floods and the government spending left and right to assist in the rehabilitation of the typhoon, the country’s fiscal deficit can only go lower. Currently at 237.5 billion pesos, the figure is significantly higher than the 53.4 billion pesos deficit incurred in the same period last year. Analysts are estimating the deficit to reach 300 billion pesos by the end of the year.
Prudent planning is still the key
Despite more situations favoring a continuing rally, investment planning still calls for prudence in the wake of all the opportunities and risks. So how should the investors play 2010?
1.) Establishing your goals
Time and again, investors neglect the most important step in investing and that is what gets most burned. Not establishing a goal prior to investing is akin to driving without any destination in mind. Two things can happen in situation like this: Get lost and waste a lot of resources. And both are luxuries you can’t afford.
2.) Analyzing risk appetite
With several asset classes that are lucrative for investors, it doesn’t mean that everything is well suited for you. Investors who are still afraid of volatility should shun away from equities and commodities and may well be better off sticking to government securities, corporate bonds and its alternative-real estate investment trust.
3.) Keeping enough funds for emergency purposes
As a rule of thumb, one should keep cash worth three to six months of living expenses placed in a very liquid financial instrument as an emergency fund. This fund sole purpose is to address emergency concerns that are unplanned and unexpected. It must readily be accessible without the need to dip into the other invested funds. The last thing you’d want is cutting your losses to pay for your car repairs after it got flooded.
4.) Speculating only a small portion of the investible funds
Investors often interchange investing and speculating. When you are speculating, you are in essence gambling – this is not investing. Speculating only a small portion of the portfolio is acceptable. After all, it is difficult to resist a hunch or a tip when it is dropped onto your lap especially if it promises immense profit for the investor.
5.) Doing thorough research
Prudence calls for thorough research before investing in any particular asset. Whether it is equities, corporate bonds or even real estate properties, due diligence is imminent in determining whether it is profitable and if it is worth the risk involve.
The investment scenario has made a drastic turnaround from last year. The opportunities just outlined above clearly gives investors an upbeat and exciting outlook heading into 2010. But this doesn’t mean you should jump into the water without careful thought. Prudent investment management is still recommended not only next year, but in any given year.
