Given how different experts often have contrasting opinions on what factors or sectors will push up or pull down the stock market next year, it is no wonder that ordinary investors get confused about which stocks to watch in 2013.
I subscribe to the use of both external and internal variables and factors when making investment decisions, known respectively as the top-down and bottom-up principles of investing, although my academic orientation makes me more inclined to use the procedure applied in top-down investing.
This technique “involves looking at the ‘big picture’ in the economy and financial world and then breaking those components down into finer details.”
Economic developments, including business conditions in the different trade and industry sectors, are analyzed “in order to select those that are forecasted to outperform in the market.”
The onus of this method comes from the understanding that when you buy stocks, you are ultimately buying a share in corporate profits, which are influenced by the overall economy.
However, this investment approach is not entirely fail-safe or totally relevant in making you win your game in the market. Its predictive character as the “holy grail” in successful investing sometimes falls short. This is because of the fact that a disconnection between basic economic variables and stock market performance also often occurs. This is why many of the known market masters and successful investors also promote the so-called bottom-up approach to investing.
The bottom-up approach focuses on the analysis of individual stocks, more particularly on the operating merits of the company. It “de-emphasizes the significance of economic and market cycles” under the assumption that “individual companies can do well even in an industry that is not performing very well.”
Entailed in the application of this approach is the “thorough review of the company’s operating efficiency, financial soundness, product advantage (technical or otherwise), management ability and track record, and profitability.”
Contrasting views
As of the third quarter, the Philippine economy was reported to have grown further. To be exact, it was found to have grown by 7.1 percent, next to China’s 9.1 percent—Asia’s best-performing economy for the period.
Among the market sectors that have outperformed and are now a source of contrasting impressions is the property market, which was the root cause of recent crises that badly affected economic and financial fundamentals.
As it is, the property sector has been booming too long that some quarters now feel its growth rate is no longer sustainable. They feel that before anyone may even realize, it will at least soon slow down.
The basis of this apprehension seems to arise from the observation that much of the third quarter’s economic performance as contributed by the property sector came from the construction of high-rise buildings. As feared, there is just so much being built. Jobs will go away as soon the projects are completed.
Exactly opposite to this view is the belief that the property market will stay robust for the long term. Greater growth is in store, not to mention the luxury property market since the demand for these properties is said to be more dictated by occupancy needs rather than speculation.
In addition, most of these properties are bought in cash rather than debt, which was the case in the last property market collapse.
Also, the inflow of big money into the various sectors of the economy is said to be just starting. Thus, the economy will continue to grow further, possibly at an even faster rate.
The contras insist otherwise. They claim that the country’s gross domestic product growth is still “unsustainable.” One reason is that the peso has become strong.
For instance, it is now threatening the viability of the business process outsourcing (BPO) industry, another sector that has contributed much of the economy’s growth.
The Philippines is now said to be “30 percent more expensive than India” because of a strong peso, a development that will provide India a meaningful cost advantage. BPO firms are now complaining of “lost business to existing destinations or canceled expansion plans (amounting to about 40 percent.)”
Some quarters say that the continuing appreciation of the peso will take away the Philippines’ comparative advantage.
“That is thinking too far from the current glitch,” according to the other camp. Times have changed.
The government is now better off economically and financially; it has gained so much experience from the past to handle problems relative to the value of the peso.
Additional considerations
The National Economic and Development Authority projects that the Philippine economy will grow between 6 and 7 percent in 2013 and 6.5 and 7.5 percent in 2014.
Neda expressed optimism that the “world economy will recover between 2013 and 2014” and that it expects the resurgence of demand for semiconductor and electronic products; the sector that has always played a big role in the country’s economic progress.
Neda also estimates that the government’s major public infrastructure projects for 2013 will complement private construction. This will allow the sector to also become a big factor in the country’s growth.
Allied to these developments is increased household consumption, which Neda expects will stimulate the “utilities” particularly power, water and gas.
Because of these expected activities, too, Neda says that “capital formation, especially in the private sector, is expected to contribute a greater share of overall growth.”
Lastly, due to the global economic recovery, Neda foresees increases in petroleum prices in 2013 spurred by higher demand for petroleum products “especially from the advanced economies.”
Bottom-line spin
With these observations, I need not mention which specific stocks now hold potential upsides for 2013.
The government’s plans to spur and sustain economic growth should suffice to guide you. It is relying on construction, the manufacture and trade of semiconductor and electronics products, housing and real estate, agribusiness and forest-based products, shipbuilding, expansion in the IT-BPO industry, tourism, financial intermediation and trade.
Probably quite disappointing to some, the government does not seem to consider the mining sector as a major contributor to the economy’s growth.
As to doubts on the vigor and prospects of the property sector as argued, the arguments in favor of its being still robust appear more satisfactory than the reasons put forward against it. Also, the fear of eroded competitiveness due to the rising strength of the peso should be far from becoming a problem following recent measures and resources given to the Bangko Sentral.
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com.)