Cashing in on the equity boom
When we talk about equity, we mean stocks or shares, essentially the ownership of companies.
The Philippines is currently experiencing an equity boom, mainly because of robust and sustainable growth in domestic consumption, coupled with reforms in the local bourse (PSE) and the macroeconomic regulatory framework (more transparency and accountability in agencies dealing with business, trade, and the economy), which has resulted in the improvement of the Philippine credit outlook. In summary, the local market is upbeat and optimistic and it has valid reasons to be. The old theory of the market behaviour’s dependency on the performance of global stock markets is exactly that – old – and needs to be retired. Yes, it MAY have some influence but the Philippine economy has been able to develop a degree of independence and insulation from foreign shocks, added to that the confidence that we gained after seeing remittances surge in spite of the global financial crisis.
What does this all mean? Basically, it means that the equity boom is sustainable and promising, and it’s about time that new retail investors cash in. When we talk about retail investors, that’s you and me, the individual investors who have some money to spare to invest in financial instruments other than savings accounts. The good thing about this is that an increase in retail investment increases confidence in the stock market because investment risk becomes dispersed over a huge pool of investors instead of being concentrated on a small group of the usual suspects (institutional investors such as investing arms of universal banks, insurance companies, mutual funds, pension funds, and the like). The increase in available capital also encourages other companies to take advantage of the stock market to raise funds, thereby increasing the value of the entire market. The key here is sustainable creation of value and the strict regulation of speculative activities. The reason why the Philippines has been spared from the global financial crisis is because of its relatively stricter financial regulatory frameworks that did not allow the proliferation of quick-buck mechanism that were doomed to fail, such as those securities created in New York and London.
Again, this simply means that that more we invest soundly and sustainably, the less likely a bust would happen. Learning from the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2006 to the present, we should already be able to pickup telltale signs of a bust. I’ll discuss one in a later post but for now, I’ll enumerate the ways through which retail investors like you and me can cash in on the equity boom.
The most difficult part of investing, I would say, is to find inroads into your desired investment. Here are the three main ways through which you can invest in the stock market, in order of risk.
- Variable Unit Life Insurance Products: This is undeniably my favorite investment product of all time because it combines the features of three financial products in one: long-term savings, investment, and insurance. Variable unit life insurance products, commonly referred to as VUL’s are slowly but surely replacing traditional life insurance products, and all because their benefits are extremely popular with clients. The good thing about VULs is that you only need to pay your insurance company and you get a policy that has features of different products offered by different financial institutions. You have a life insurance like those offered by insurance companies, an investment fund similar to mutual funds, and a withdrawal option, as many time/term deposit products would have. To top this all off, your earnings from investments is tax-free, because this is an insurance product! You also get to professional service of an institutional fund manager, which will make investment decisions for you. So don’t need to think about it everyday.
- Mutual Funds: You can also invest in equity or stock mutual funds. These funds are offered by financial investment companies, such as those attached to insurance companies and universal banks. These funds are financially managed by professional fund managers so you don’t need to make decision on which individual stock to invest in. You just need to decide how much you want to invest in the fund. Mutual funds also allow for more frequent and earlier withdrawals as opposed to a VUL insurance product. In VULs, you can usually withdraw after 3-5 years and only four times per year. Some mutual funds only require a holding period of 30 days. So you can decide to withdraw you investment or roll it over for another 30-day period. Mutual fund earnings, however, are considered as income and are subject to a withholding tax of 20 percent.
- Online Retail Stock Investing: Thanks to advances in information technology, you don’t need to physically go to the stock exchange and talk to a stock broker to invest in the stock market. And thanks to the PSE’s policy of encouraging small investors to participate in the stock market, you don’t need hundreds of thousands of pesos to invest in stocks. Many online stock brokers have developed platforms that will allow small investors to participate in the stock market for as little as 5,000. The difference with this option and the two above is that the online portals provide basic brokerage services and you are completely in control of your investment choices, including when to buy or sell and at what price. This services are for people who really want to experience stock investing in person and is not for the fainthearted. Earnings from what you invest in these stock market are subjected to fees and taxes on a per transaction basis, which in total is a little bit less than what you will be charged with a mutual fund. You also don’t need to pay for a fund manager’s management fee as you manage your fund yourself.
If you have specific questions about investing in the stock market, do let me know through the comments.