BY IKKA C. DE GUZMAN
The whole world may be standing at the foot of what could be the deepest global financial downturn since the Great Depression of the 1930s, but this does not stop some courageous investors from literally taking a gamble.
Among investment instruments available, the stock market comes as a natural option for investors, albeit with strong caution involve, as numbers continue to falter in most markets.
"The Philippine Stock Exchange has dropped incredibly, reflecting the dip in stock markets worldwide," said Fernando Jose Sison, president of the Bank of the Philippine Islands (BPI) Investment Management, Inc.
Particularly, the country has been hit by the turmoil in the form of capital outflows as offshore investors caught in the credit crisis dumped even their profitable holdings in the local bourse in order to raise cash to offset their losses abroad.
The steep decline in the value of prized stocks has stoked fears among local investors that the worst is yet to come, prompting them to dump equity shares and head for safer havens.
"There has been massive loss of confidence because the ones who invest in stock markets are also well-read, and they are very aware of what’s been happening around the world," said Mr. Sison.
Despite the widespread exodus, Teresa Javier, senior vice-president of the Asset Management Group at BPI, believes the local investors have yet to join the global anxiety attack. Stock investors comprise a meager 15 percent of the country’s population.
"Investors are not immune to the general�risk aversion�prevailing in the market, but we have not seen [the] panic," said Ms. Javier.
What industry experts have been witnessing is a more instinctive flight to less volatile products like fixed-income funds.
"There has been a shift to more conservative vehicles such as special deposit accounts, while some took advantage of higher yielding government bonds to lock in long-term investments," Ms. Javier added, noting that most asset classes have performed poorly with the exception of high-grade government bonds.
Fight or flight
Expectedly, financial institutions are asking investors to reconsider retreat. The Fund Managers Association of the Philippines (FMAP) expects the impact of the crisis on the local market to be minimal, and suggests that investors should stay put as financial cycles dictate that conditions will stabilize at some point.
"If you go in and out of the market, that’s trading, not investing," said Francisco Colayco, chairman of the Colayco Foundation for Education, commenting on the likely widespread fight or flight response from investors.
At the 11th annual Wharton Investment Management Conference held last month in Philadelphia, top financial experts agreed that the current bear market offers great opportunity to buy distressed stocks at base prices.
"Now is a good time to start investing because the market has practically been reset to 2004 [values]," agreed Emmanuel Soller, a trader at Equitiworld Securities.
The drastic drop in global equity prices, said PJ Garcia, president of the FMAP, is the perfect opportunity for young investors, or those who can afford greater risks, to make an entrance in the stock market.
"Once the market recovers, it will be a lifetime or two before the world sees it this low again," said Doby Atilano, a registered financial planner and founder of the Global Investors Center.
Daniel Miller, vice-president of New York-based Gamco Asset Management Inc., agrees. "We are seeing opportunities to buy into companies at prices that you have only dreamed of," he said in a previous interview.
Marcelo Ayes, Rizal Commercial Banking Corporation senior vice-president for financial markets, said local stocks have shown signs of being oversold, making it a good time for investors to acquire shares of large corporations. These bargains have been made more appealing by incentives from the Bangko Sentral ng Pilipinas (BSP), which extended its postponement of the documentary stamp tax, an added cost to investors in the local bourse.
Supporting the cheery atmosphere is the analysts’ insistence that despite the net selling in the market, pockets of appreciation still exist. The fact that people are still able to sell, said Mr. Colayco, means that other people are still buying.
"Stock market still has the higher yield. It can go up to 10 percent in a day if there’s recovery: no other investment vehicle can provide that," Mr. Colayco said.
Mr. Soller, for his part, said that the current undervaluation of stocks is due largely to the pessimism of investors; "but value for value, if you look at the fundamentals, the upside potential is still greater than the downside, so this is a good chance for long term investors to gradually accumulate."
DBP-Daiwa Securities advised investors to focus on stocks with recurring incomes, strong cash flows, a dividend history, meaning those that can give consistent returns — and those with the ability to scale up. "Remain defensive while looking out for opportunities; look for stocks that have strong growth potential," it said.
Indeed, in such volatile investment conditions, exercising caution is key. Even industry insiders admit that the worst may not be over yet, and advise bargain buyers to use cost averaging — putting in money in small amounts in regular intervals — instead of investing in lump sum, and to remain prudent when selecting stock options.
Mr. Atilano suggests exposing 10 percent of one’s savings each year over a period of 10 years to speculative investments, regardless of the market’s condition.
Safety first
Meanwhile, risk-averse investors concerned with capital preservation can opt to park their cash in fixed-income instruments or interest-bearing products like money market funds — mutual funds that invest in short-term debt instruments — treasury bills, and high-yielding special deposit accounts (SDAs) which have lower risks because of their short-term maturity but can still provide a steady income stream.
"In these times, it’s best to invest in something that can be liquefied when the need for cash arises," said Mr. Colayco.
Should the tides turn bleaker, investors with more than P250,000 — the maximum deposit amount guaranteed by the Philippine Deposit Insurance Corporation (PDIC) — could start exploring and investing in other jurisdictions through the Internet, said Mr. Atilano, referring to tax-free havens abroad like the Isle of Man, which guarantee up to 90 percent deposit insurance.
Those willing to take a peak out of their safety nooks can have a bit of both worlds. Long-term thinkers can start building up a portfolio of bonds and equities, with the former moderating the effects of market fluctuation and the latter enhancing portfolio returns, at least once market conditions begin to normalize.
But some financial voices are in dissent.
Mr. Colayco, for one, stressed the need for liquidity in weathering tough times, suggesting that investors keep their cash or put them in simple, tangible investments like property, over which they can have more control.
Indeed, many investors who sold their stakes are opting to stay liquid, a smart move, said some analysts, even if one is on the lookout for possible opportunities that may surface in the market. "Given the current condition, I’d say you need at least three years’ worth of liquidity just to fund your personal requirements," added Mr. Atilano.
Back to basics
Investors who do choose to take the plunge are advised to stick to firms that are registered in different jurisdictions and have global operations — hence are not dependent on the domestic market — and to sectors that stay in demand regardless of the state the economy is in.
Among the industries expected to weather the current financial catastrophe are infrastructure, food, services, and resource businesses. Canned goods, and lifestyle vices like cigarettes and alcohol — commodities which thrive in times of economic depression — are also good bets.
"Consumers have shifted their priorities back to their basic needs, so now’s the time to invest in sectors that are resilient and companies, like telcos and utilities," said Ms. Javier. Despite the 200-percent drop in the prices of oil, governments and private enterprises continue to pour millions in developing green technologies, and some experts say alternative power sources could be a safe investment sanctuary.
"Pawnshops are bound to see a lot of clients if the situation gets any worse," added Mr. Atilano. Another investment alternative that has been getting a lot of attention especially from returning overseas Filipino workers (OFWs) is franchising, an emerging sector which, according to data from the Association of Filipino Franchisers, Inc. (AFFI), raked in P13.8 billion in sales last year.
"The Philippines has huge potential [for franchise businesses] because certain areas are not developed yet. [And in business] the earlier you are in the game, the better," said Rommel Juan, president of AFFI.
In Asia, international finance experts have their eyes glued on health care, tourism and real estate, which still hold a lot of potential as emerging economies continue to expand, albeit at a much slower rate.
But local analysts warn against investing in the property stocks as mass layoffs abroad could prompt overseas Filipino workers, which comprise more than half the residential segment’s market, to default on their home loans. "The coming year could be a hard year for condominiums," said Mr. Atilano.
The country’s real estate sector, which up until the first half of the year enjoyed unprecedented growth, is in danger of coming to a standstill as major developers pare down their budgets and postpone acquisition of raw lands and the launch of new projects until the market stabilizes.
Condo builder Vista Land and Lifescapes reports that buyers have already begun availing themselves of smaller home packages, averaging P2.9 million each as of September from P3.5 in the same period last year.
Road to recovery
While industry insiders refuse to peg a definite date for total recuperation, many agree that rescue steps being implemented by big economies, like the US and China bailouts, should help restore investors’ confidence in the global financial system.
But for now, local industries are bracing themselves for darker days ahead. "The crisis will hover around �til next year, and we may get more affected through our businesses: exports will remain low as long as foreign markets are down, and layoffs of OFWs abroad will definitely affect our consumer spending here," said Mr. Atilano.
Already, demand for electronics, the country’s top export earner, has already declined as demand for high-tech products fell in the US and Japan, the Philippines’ two biggest trading partners which cumulatively receive over 31 percent of the country’s exports. Reduced consumer spending has also prompted foreign retailers to reduce their volumes.
"Big US department stores like Nieman Marcus have already cancelled orders for Christmas goods from the Philippines," said Mr. Colayco. On the other hand, the slower increase in commodity prices could bring down local manufacturing costs, making local industries more competitive than their foreign counterparts.
The country may have something to gain in the business processing outsourcing (BPO) arena, as cost-cutting measures could prompt US and European firms to ship more jobs to low salary hubs like the Philippines. Data from the Business Processing Association of the Philippines show that the sector is currently earning $4 billion a year in revenue, and the organization claims there’s room for as much as 40 percent growth next year.
Optimists predict that markets should bounce back by the second half of next year, with the downturn in consumer demand being offset by more efficient inventories.
"In 1930s and in 1997, businesses were burdened by their stockpiles when consumers stopped buying, which kept them from recuperating fast after the crisis; but now, just-in-time technology have allowed firms to manufacture products only as needed," said Mr. Atilano. Still, widespread price drops due to overproduction across all categories in the US show that many producers have yet to adopt these cost-saving measures.
The extent of the damage caused by the�credit crunch�and the strain on companies’ balance sheets have led some experts to believe that it is going to be a very long journey to recovery. "We do not expect stability to happen immediately as there are too many things to fix: financial institutions, market regulations,�risk management practices," said Ms. Javier.
This sentiment is shared by majority of investors, who stand at the sidelines waiting to enter at better market levels. "If we follow history, stock markets normally recover within eight months following a crisis, but this is a credit crunch and today we are facing uncharted territory," added Mr. Colayco. The backlash is made more stark by the continued dependence of many developed and emergent markets on trade with the US, an entanglement that was virtually nonexistent in the 1930s.
At the moment, the few souls who are braving the stock market blizzard, according to Mr. Soller, either just got into the markets early this year, or got out of it before the big global crash and are unharmed enough to bite on the bargain prices.
But at some point, said Michael Roth, a founding principal of Wisconsin-based Stark Investments, people are bound to get bored with being afraid and markets will start to have an upside-only scenario.
Despite grim predictions by the country’s business sector, the Asian Development Bank argues that the country will not enter into a recession, but stated that the pullout of investments could result in higher unemployment and sluggish domestic demand in 2009.
There is more good news from foreign financial institutions like JP Morgan, which said that the Philippines is capable of surmounting the global slump, thanks to adequate foreign exchange reserves, a sustained current account surplus, and a strong economic position driven by private consumption and services. Deutsche Bank recently declared the Philippines as the only country in Southeast Asia that had so far eluded the harsh impact of the global turmoil.
Safety nets set up to counter the rice crisis earlier this year, such as fertilizer coupons, cash for the poorest and rice subsidies are also proving themselves useful in the present predicament. Finance Secretary Margarito Teves has said that the government is positioning more funds for infrastructure, education and food security — activities that would pump-prime the economy — to help keep recession at bay.
It remains to be seen whether the country will rebound faster than its neighbors, but in the long run, industry experts maintain that the crisis’ lasting impact is a long term gain.
"We can’t get any lower than where we are now, and those who decide to invest today can always take comfort in the fact that markets emerge more stable after a crash, because banks and companies learn to regulate better," said Mr. Atilano, adding that the current conundrum, whose highlights are broadcasted daily in the media, is also the perfect time for amateurs to learn the ropes of global investing.
Predictably, analysts say financial institutions will be more conservative in dealing with complicated transactions. But this will not be a one-way street. Mr. Sison predicts the hard lessons learned from the present crisis will also push investors to be more picky in choosing their investment chests. "There will be a shift from excessive risk taking to high risk aversion, particularly in local stocks," said Ms. Javier.
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