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The Philippine economy grew 6.6% in 2012; how did you perform?

It’s all over the news yesterday: the Philippines government exceeding its own targets and hitting a growth of 6.6% in 2012, probably one of the highest GDP growth rates in the post-Marcos era. The government-set target was between 4% and 5% in the beginning of the year, and was later revised upwards to between 5% and 6%. The final outcome still beat the revised expectations.

The Philippine stock exchange has also broken so many record new highs (38 new highs in 2012) that it has become the new normal, with new highs coming within days of each other. Just this month, the PSE index breached the 6,000-, 6,100-, 6,200, and 6,300-marks. Can you imagine that just a little over 10 years ago, during the late-Erap and post-Erap period, the index couldn’t even breach 1,000 points?

So this is great news for our country’s economy and for public companies and those who invest in the stock market. But is it good news for you? How did YOU perform in 2012, financially. Did your income also grow 6.6%? Did you savings go up 33% like the stock market? Were also able to protect yourself from financial losses due to injury, disease, or calamity? If you weren’t able to do this, then maybe you were doing something wrong… Or maybe there was something that you weren’t doing.

Maybe this year in 2013, it’s time for you to start investing and be part of the Philippine economy’s and the stock market’s growth. If you’re interested on getting started, send me an email at manilafinanceguy@gmail.com.

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 http://www.understandingratings.com

BSP Governor urges PSE to widen reach

In this Inquirer article, BSP governor Amando Tetangco, Jr. urges the PSE to install the necessary technological infrastructure that will allow Filipinos outside of Metro Manila to participate in the capital markets: http://business.inquirer.net/56647/bourse-urged-to-go-nationwide

I agree with Governor Tetangco wholeheartedly. I think this move will be beneficial, not only for the investing public but also to companies seeking capital for their entrepreneurial venture. I have read in some analysis that Philippine stocks are deemed “expensive” relative to other stocks in the Asian region. I take this to mean that the investing public has an appetite for equities and this should encourage more companies to go public. Imagine how much more capital will be available if the PSE will be able to successfully rollout a mechanism that will allow Filipinos outside Metro Manila to directly participate in the local bourse. The article cites a survey that says that less than one percent of Metro Manileños invest in the capital markets while the number for people surveyed outside Metro Manila is almost zero.

Aside from this increased participation from the investing public, such technological infrastructure will also bring public equity closer to companies in the provinces, making them more productive. I would even go as far as suggesting that a second independent stock exchange be opened in Cebu to cater to the equity financing needs of Visayas-Mindanao businesses. Of course, this goes against the grain of the trend of consolidation among exchanges all over the world. PSE needs to do a better job at promoting investment into equities and using the equity market to raise capital.

The last item on my wish list would probably be an alternative exchange for emerging companies/small caps. This will be a great way to support our small- and medium-sized enterprises/small- and medium-sized industries who might find it hard to comply with the requirements of the PSE’s main board but are in need of capital that bank loans will not be able to provide. Once we bridge that crucial funding gap, I am optimistic that we will see a lot of our industries succeed.

Another all-time high; it’s time to buy!

In the days leading up to the 45th Asian Development Bank Board of Governors Meeting (Manila 2012), the Philippines was featured on CNN’s Eye On program. For one week, all eyes were on the Philippines – from governance to business, to food and culture, to traveling. It was a fitting opening to Manila 2012 and that week ended with an all-time high for the PSEi, ending at past the 5,300-point mark. When I was still trading, 3,500 was the all-time high. The stock market has come so far.

A lot of you have been asking me how I picked my stocks. I have a simple, fundamental criteria for choosing stocks on the PSE and it boils down to these two:

P/E ratio of 9x-15x

The stock price of the company should be around 9x to 15x of its earnings per share. I have based this criteria by studying the consistently performing stocks over a period of time and I’ve seen that these companies have a price to earnings ratio of 9x or 15x their earnings per share. This means that the stock is not too overvalued (unlike some mining share prices that can be as much as 50x their earnings per share) that there’s too much risk of price drop or too undervalued that it doesn’t appreciate. This is the optimal P/E ratio for me that I think will appreciate in value over time.

Share Price of P20-P100

I make it a point to invest only in shares that are priced between P20 and P100 because there is a psychological room for price appreciation. I would rarely invest in centavo stocks and I’ve always stayed away from blue-chip because, well, everyone’s buying them. They’re too liquid. Everyone wants to have an Ayala Corporation, a Globe Telecom, a Manila Water, a PLDT or a San Miguel Corporation stock. I’d rather go for hidden gems in the emerging middle-market companies.

Here’s where I will put my money in:

ICTSI, Aboitiz Equity Ventures, DMCI Holdings, Union Bank of the Philippines, Aboitiz Power, Universal Robina Corporation.

Happy investing!