‘Stock market rally sustainable’

“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.

Credit rating

How long can this last?

The much-awaited credit rating upgrade to investment grade will provide a boost, and as we approach the so-called “demographic sweet spot”—where a young and increasingly prosperous working population drive rapidly increasing consumption—a long period of prosperity for the Philippines is forecast by most economists.

Infrastructure, on which the government has put particular emphasis, will be critical to ensuring lasting economic growth.

Without the necessary investments in power plants, roads, airports, etc., the growth we are seeing could easily stall. Streamlining the bureaucracy and modernizing the regulatory environment are also important, and the positive reforms being implemented should be institutionalized so that they can no longer be reversed.

How the government performs on these fronts will be closely watched.

In the near term, what factors could cause the market to slow down?

A more sustainable recovery in the more developed markets such as the United States and Japan could cause foreign money to flow out of our market and into those markets.

Another is inflation and the likely attendant increase in interest rates, which would make other investment instruments more attractive.

Which brings me to another point.

I would put a cautionary note that the stock market is not for everyone, and is not the only way you can grow your money.

If you’re joining the bandwagon and are in it to try to make opportunistic gains, or simply relying on tips, you could get burned pretty badly when the inevitable correction comes.

Diversification

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.

Financial manager

However, the key is in knowing what you are doing.

For most of us who have neither the time nor the money to understand and play the markets properly, it is probably better and easier to leave management of our funds to a reputable company with professional fund managers.

Growth is sustainable as it stands on excellent fundamentals, but it will not be a straight line upward—corrections are healthy and inevitable.

You can leave the worrying about how to allocate your money and when to move it to a professional.

It is also advisable to talk to a financial advisor.

A good one will take the time to thoroughly understand your needs, determine your cash flow requirements, and help you allocate your funds to various types of financial instruments, both for short and long term needs.

He or she will also facilitate the placement of your funds and ensure you fill out all the necessary documentation properly.

As to how high the PSEi can go this year … 7500?  Why not!

(The author is president and CEO of Sun Life Financial Philippines.)