Archive | Finance 101 RSS for this section

How will a ratings upgrade for the Philippines affect you?

Ratings Upgrade

Ratings Upgrade. The Philippines is expected to receive a credit ratings upgrade from the big three ratings agencies. But how will it affect you?

Talk is rife about an impending credit ratings upgrade for the Philippines. The next round of upgrade will be the most significant one because it will bring Philippine debt to investment grade status, which basically means that ratings agencies think that credit risks are significantly reduced compared to before, when Philippine debt is considered “speculative” or below investment grade.

But how will this affect our personal finances? And what are ratings anyways?

First to answer the basic question of what ratings are. Credit ratings are opinions that are given by independent ratings agencies on the likelihood of a corporate or a government entity to default on its debt. There are three large global independent ratings agencies, and these are Standard & Poor’s, Moody’s and Fitch’s. These ratings firms started more than a century ago, to provide an independent risk analysis on large government and corporate projects that are looking for investments. Founders of ratings firm S&P saw that information is not freely and widely available to those who wish to invest in government and corporate capital expenditure projects. The solution that they come up with was to establish a credit rating firm that is independent of investors and corporations/governments to provide unbiased opinion on whether lending to an entity is risky or not.

Ratings on governments are referred to as sovereign ratings and each ratings agency has its own methodology of coming up with an opinion. There are many factors considered beyond economic numbers as risk is not always monetary in nature. This opinion is not a recommendation to invest or not but is rather an assessment of perceived risk relating to lending to a specific government. The ratings are often summarised into a letter grade ranging from AAA to D, AAA being the highest investment grade. The Philippines is currently one notch below investment grade and is expected to leave “speculative” status this year.

What does this mean for average Juan? The simplest answer is that it may mean easier, cheaper credit. I say may because the effect will not be felt directly by everyone, at least in the short-term. The ratings will affect directly the investors – those who invest in Philippine government bonds, and the borrower, i.e. the government of the Philippines. It is expected that a credit upgrade from speculative to investment-grade will mean that it will be a lot easier for the government to borrow money. Not that this is not already happening. An “investment-grade” status helps convince more institutional investors to purchase government bonds. As it is, bond issuances of the government has always been oversubscribed, which means that there is higher demand than what the government intended to borrow. At the same time, it will make borrowing cheaper by way of lower interest rates. Interest rates take into account the risks associated with an investment. Since the upgrade basically means that risks are reduced, then the government can reduce the interest rates of its debt, making borrowing a lot cheaper. Also, with the expected increase in the demand, the government will be in the position to lower interest rates even more.

If you’re planning to invest in government securities such as bonds, this means that returns from interest will be lower, but your investment will be much more liquid as there will be a bigger market for it. This is a good thing, as you don’t want to get stuck with a certificate that no one would buy. In the long term, it is expected that business loans and personal loans will be a lot more cheaper, as there will be an increase in funding liquidity. Although all of this will be dependent on the monetary policy that will be adopted by the Bangko Sentral ng Pilipinas (BSP). In short we’ll have to wait and see.

In summary, a credit ratings upgrade will be good in general, and will benefit everyone in the long-term, as long as it is coupled with sound monetary policy as implemented by our financial regulators.

For more information on credit ratings, visit


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.

  1. 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.
  2. 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.
  3. 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.

PSEi breaches 5,000-point mark

Last week, the Philippine Stock Exchange index breached the 5,000-point mark.

But first let me explain what that statement means. What is an index and what does breaching the 5,000-point mark mean?

If we make an analogy between the stock exchange and school marks, the index would be your average. Generally, a stock exchange index is a weighted average. In some schools, average grade are also weighted, depending on the thrust of the school. For example, a science high school may give more weight to science and mathematics than to literature. In universities, a lecture class may have more units than a laboratory class. This is the same in the stock exchange, some stocks have more weight than others, and this is true in the case of the Philippine Stock Exchange Composite index or PSEi.

The PSEi, formerly known as the Phisix, is composed of a basket of 30 stocks, representing different business sectors or entreprise categories. Each of the thirty stocks has an equivalent weight to the index. The criteria for the weight is determined by the board of the Philippine Stock Exchange. I can’t remember if it’s the stock price of each component stock or if it’s the market capitalisation (which is a function of the stock price) that is multiplied by the weight then added together to form the index. The index is measured by points precisely because it’s not an absolute monetary value but a relative value. So when you say that the PSEi breached the 5,000-point mark, it means that the stock price of these component companies, relative to their weight to the basket, altogether went beyond the 5,000-point level.

So what?

In the stock market, as with school marking, this milestones are often regarded as psychological barriers. For many of us who go to school that grades us in as scale of 0-100, an 86 is as good as an 89, but a 90 is a whole lot better that 89, even if it’s just one point more than 90. That psychological barrier between 89 and 90 is the same psychological barrier that retail companies use when selling you clothes that are “Under 200”, i.e. 199.99. It’s just 0.01 away from 200 but you still think it’s a lot cheaper, until you reach the cash register. In the PSE, 100-point levels are know to be psychological levels, and you can see stock market watchers saying that market players are testing the levels when within the day, the index goes up to the next 100-point mark and then go down, meaning, players don’t think that the market can sustain the gains and will start selling stocks once they believe that the highest index price has been reached. You will also read about the market riding on a momentum, when players keep on buying despite the market going past psychological levels.

Within the last year, the market has gone from a low of 3,000 points to as much as 5,000 points. Is that a good thing? Yes! Since the PSEi was created, the index has gone to a low of 900 or so points, while barely moving in other years. A 2,000-point increase in  one year is remarkable.

I have read in another post how indices are used in investing in the stock market. I say it’s time to invest in the stock market. In my next post, I will talk about how you can take part in this winning streak without losing your hair in the process.

A Layman’s Guide To Picking Stocks

For a lot of people, the stock market is a big black hole and stocks are nothing but worthless pieces of speculative paper. As I’ve discussed under Stocks 101, this is of course not true. Stocks represent ownership of a company – a claim on the assets of the company and a right to share in its profits.

We’ve also discussed how stock prices rise and fall and what influence these fluctuations. In this article, we will discuss how to pick stocks for your investment.

For me, Rule #1 is “Never invest in the stock of a company whose products you’d never buy.” Only invest in companies whose products you believe in. This is a personal opinion, I’m not sure if you’d read this rule elsewhere. But I believe that investing in the stock of a company whose products you consume creates a beneficial investment cycle. Consuming the products of the company you invest in improves their financial health, which enhances the public perception
of the company and enhances the stock price. For example, why will you buy stocks of GMA Network, Inc. if you’re a die-hard Kapamilya? Most of a broadcasting network’s earnings come from advertising, whose rates are determined by their ratings or audience shares. If you’re not contributing to GMA’s audience shares, it doesn’t also contribute to GMA’s better financial performance, which will be reflected on GMA’s stock performance.

There two main methods that stock analysts use to analyze stocks: technical analysis and fundamental analysis. Technical analysis refers to the study of the movement of the stock price over a certain period of time and making recommendations based on the trends gathered from the observations on the price movements.Fundamental analysis is the analysis of the financial fundamentals of the company, assessing it financial health and determining how these fundamentals will influence future stock prices and dividends.

No analysis is better than the other; in fact, I believe that both methods are necessary in making very good stock picks.

Another thing is for sure: there are a lot of gold mines in the stock market. Striking the gold pot does not mean being limited to the same stocks that everyone else is investing in, so don’t worry about not being able to acquire the stocks that business writers are raving about.

Online stockbrokers provide research services at no extra cost, but of course the risk will be borne solely by the investor, which means, if you made any investment based on the research advice provided and you incurred losses from this investment, the research firm will not be liable for this loss.

For me, you need a good combination of fundamental data and technical analysis before you decide on investing a significant amount of money. Personally, I use two metrics in determining which stocks I want to invest in. First, the stock price should have increased by at least 50% over the last twelve months. Second, and this one gets a bit more technical, the price to earnings ratio should be around 9-12x.

The price-to-earnings (P/E) ratio is the peso amount of the price of the company’s stock divided by the peso amount of the earnings of the company per share (Earnings per share is the total earnings of th company divided by the number of shares, for example, if earnings is 1 million and you have 1,000 shares, earnings per share is 1,000 pesos per share). The result is a multiple that roughly tells you how much the public perceives the company is worth in relation to its earnings. For example if the stock is currently trading at 5,000 per share and the earnings per share is 1,000, you have a P/E ratio of 5, which would be too low, based on my standards. A company’s P/E ratio can also tell you a bit about the characteristics of the company. A company with a low P/E ratio is usually in the traditional industries and has been around for a bit and has consistently paid dividends while companies with higher P/E ratios are younger and tend to congregate in the emerging industries. That said, companies with higher P/E ratios tend to be more speculative. For me, my speculative threshold is a P/E ratio of 12-15x. This means that the public thinks you are worth 15 million pesos  even if you just earned  1 million pesos over a certain period.

There were about 10-15 companies who met my standards when I first did my stock picks. Weeding out some companies that I wouldn’t be a consumer of, I ended up investing in seven stocks. So far, my strategy has worked. I’ve had minimal losses on some speculative stocks but earned 15% over the last one-and-a-half months.

If you want to know more about which stocks I picked and why, or if you need help in creating your own investment strategy, let me know.

Online Stock Brokers Allow Easy Entry Into Stock Market

Gone are the days when having a stockbroker means you’re a millionaire with a lot of cash to spare. Thanks to the advent of new and secure online stock trading platforms, investing in the stock market can be as easy as opening a deposit account with your bank, or even easier. Read More…

Stocks 101

This will be veering away from my lesson plan but I believe that when an opportunity strikes, it has to be seized. Friends, the Philippine Stock Exchange Index or PSEi is one of the best performing indexes in the Asian region and it would be a letdown for me if I don’t let you in on this opportunity to earn a lot more than your usual deposits. But before anything else, let’s start with stocks. What are stocks anyway? Read More…

It’s About Time For Time Deposits

A few years ago when I was still in high school (this makes me re-think the use of the adjective “few”), I was encouraging my friends and classmates to pool our funds together so that we can invest our money in a time  deposit account. I chanced upon a centerfold ad on Buy & Sell back then, displaying the requirements and interest rates of time deposit accounts of major banks. Would you believe me if I tell you that in 2000 (ehem, high school), banks were offering interest rates on time deposits of up to 9.75% p.a.? To put that into perspective, these days, a major bank like Metrobank will give you an interest rate of 1% per annum… if you invest 1 million pesos… and if you hold the money for 5 years… plus one day. I’m telling you, that money would be better off sitting somewhere else. Read More…

What’s So Special About Special Savings?

Think about that emergency fund that you have set up for the past few months. We’ve let it idle in a savings account and it’s reached quite a substantial amount already. Isn’t it time we do something about it?

But first, we need to think of how we intend to use this fund. First, is this an amount that we are willing to risk? Since this is your emergency fund and emergencies can happen any time, we don’t want to risk losing money in the short-term for long-term gains. We want to lock in the value of this money. Second, are we going to need this money anytime soon? Can we lock this money in an investment account and wait for it to grow? Again, since emergencies can happen any time, we want this fund to be as liquid and as accessible as possible. So what can we do with this fund so that it won’t have to do with the measly earnings from a regular savings account?

This is where special savings accounts come in. What exactly makes a savings account a special one.

Special savings account, as the name implies, has special characteristics that are a variant of regular savings account. The main come on of special savings is it’s tiered interest rates. In finance, when you encounter the word tiered describing a product, it means that the interest rate changes according to the amount of money you have put into the account or the product. In the case of a special savings account, your deposit will earn more interest if you deposit more.

Another variation of special savings accounts is that you only have a minimum number of withdrawals allowed per account per month, this usually ranges from once a month to four times a month. This can be a benefit or disadvantage depending on your perspective. For me, this is beneficial because it hinders you from making a withdrawal every now and then, but at the same time, it allows you to withdraw the money in case of an emergency.

Additionally, since special savings accounts are still considered as deposits, you can rest assured that the Philippine Deposit Insurance Corporation (PDIC) will assure the amount of money you have deposited up to 500,000 pesos. Most investments don’t really carry any guarantee.

So if you think you’re ready to invest and you think that this would be something that you’d be willing to start with, tune in tomorrow as we explore some products in the market that offer special savings or special deposit products.

So I’ve Been Saving… Now What?

In the past two months, we’ve been talking about saving as the foundation to your financial independence. I’ve been writing about how you should build your emergency fund and separate your expense account from your savings account. Let’s say by now you have done so and you have completed your emergency fund, what’s your next step? By now you’re ready to start investing. Read More…

A Checklist For Checking Accounts

In the age of online banking, mobile bank transfers and credit cards, are checks still relevant?

I was walking through Greenbelt 5 one day where nothing retails at less than 500 pesos anymore, except for water at that gelato store, which is 99 pesos a pop. I imagined, if I went into one of these stores and didn’t have any cash or swipable plastics on me, would they accept my good old check? Read More…