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Financial IQ Philippines Quick Hit(s):
This is an article written before Fitch upgraded Philippines' investment rating. Definitely, we can still invest on the Philippines. For short-term investors, there may be more volatility. For long-term investors, we may reach several new highs along the way.
“Can we still invest?”
That’s a question you often hear these days. The stock market has been on an extended run-up, reaching new highs almost every other day this year.
Not even the most optimistic forecast I heard last year predicted the stellar performance we’ve seen so far! And warnings are now being issued that the market is overvalued.
But yes, while we expect a healthy correction, there are three reasons why we believe this rally is sustainable:
Liquidity. There is just too much money in the system. Domestic liquidity alone would be enough to push the market to all-time highs; this is further exacerbated by foreign money pouring in as the west struggles with weakened economies.
Robust earnings growth. The premium prices seen now are very well supported by the strong earnings growth of the listed companies. Earnings were up more than 15 percent in 2012, led by the banking sector.
With a domestically driven economy and a GDP growth forecast of between 6-7 percent, this strong earnings growth is expected to continue.
Strong political mandate. The changes the government has been making are structural in nature, and set the stage for more lasting economic growth. Efforts to root out corruption and improve transparency and governance at all levels have been particularly well received.
You would need a fairly large amount to be able to diversify your portfolio properly, and a strong stomach to be able to take the ups and downs. You should be prepared to leave your money for several years, but also have the wisdom to know when to cut your losses and the discipline to get out if it’s unlikely for a stock to ever recover in price or to recover within a reasonable timeframe.
Too many people hang on to a stock until it’s practically worthless!
Pooled funds such as mutual funds and unit investment trust funds (UITFs), allow you to participate in the market even with a small amount of money, as minimum investment is only P5,000.
They also have the advantage of being run by professional fund managers. An equity fund will have up to 90 percent of its funds invested in a wide variety of stocks (100 percent for UITF equity funds), giving you the diversification you need.
Bear in mind, however, that returns are not guaranteed and an equity fund will generally move up and down with the market.
An older person or one who needs the money in the near future is better off investing in bonds, which give lower returns but are more stable. A pooled fund invested mainly in bonds is a good alternative.
In fact, while more people have been investing in equity funds, bond funds are still the most popular pooled fund in the country, perhaps an indicator of generally lower risk appetites.
Balanced funds, with their close to 50:50 mix of stocks and bonds, have also been growing as they provide a good balance between risk and return.
Perversely, bond prices rise as interest rates decline, so with the declining interest rates of late, bond funds have also been giving good returns.
Given the strong economic performance of the Philippines, the massive liquidity, and the expected ratings upgrade, interest rates are not expected to rise anytime soon.
Thus, this is a good year to invest because wherever you put your money, whether in stocks or bonds, you are likely to make good returns.
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