In an uncertain financial environment, diversify

Last of two parts

As the national elections draw near, campaigning is expected to intensify and political spending is seen rising substantially, providing an added boost to business and the economy.

The figures cited by Pulse Asia—that 20-22 percent of voters are in the Visayas and 24-28 percent are in Mindanao—the areas where Vice President Jejomar Binay had shown leadership in the survey, could mean campaign strategy, as well as political spending, will focus on these areas,  Jose Mari Lacson, head of research at Campos Lanuza & Co., said.

“If this is accurate, we could see these areas benefiting more from political spending. Among the retailers, Metro Retail Stores may benefit the most from consumption demand spike driven by election spending in its core market,” Lacson said.

All in all, Lacson said investors should be patient and let valuations come to them instead of going after share price rallies.

Top picks

“Although capital gains will be scarce in 2016, the PSEi can still perform well by mounting up on domestic consumption-related stocks, whose valuations stand on firmer ground and will not easily recede with the retreating tide of capital,” Lacson said.

“We also like infrastructure and power-related companies that have invested in projects and capacity back in 2013 because the timing of returns and revenues will be perfect in 2016-2017, when these are completed. Barring a collapse in transportation and power demand, this should reflect a strong kick in earnings,” he said.

For Citigroup stocks analyst Minda Olonan, the strategy should be selective stock picking, focusing on stocks that were trading well below mean valuations like Ayala Land, Metropolitan Bank and Trust Co. and Puregold Price Club., alongside relatively “defensive” plays like SM Prime, Banco de Oro and Universal Robina Corp.

Risks, challenges

Banco De Oro Unibank chief strategist Jonathan Ravelas said that despite his bank’s cautiously optimistic economic outlook for 2016, investors should be cognizant of several risks and challenges that could temper positive expectations.

“On the external front, geopolitical tensions in the Middle East could sharpen volatility in the prices of crude oil in the world market. Prolonged uncertainties could impact the ability of the country to deploy more overseas Filipino workforce in the region as higher fiscal deficits slow down construction activities in the region,” Ravelas said.

The Middle East accounts for more than 70 percent of the country’s overseas labor force and remittances.

Ravelas also noted that China’s slowdown would gnaw on the country’s trade performance with China, now accounting for 20 percent of total trade.

On the domestic side, he said the impact of the El Niño dry spell would put pressure on local inflation and interest rates.

Diversification

“While our base case scenario is cautiously optimistic, investors should always structure their portfolio against a worst-case event or what others would call the ‘Black Swan’ event. The prudent way of managing one’s portfolio is to always remain diversified in the different asset classes and in currencies,” Ravelas said.

He said investors could look at diversifying his local investments given interesting opportunities outside of the Philippines.

“Investments in fixed income securities could be a mix of cash instruments for liquidity needs, investment grade bonds both sovereign and corporates, and a few non-investment grade fixed income securities to enhance yield of the portfolio,” Ravelas said.

“Also, having a mix of short-term to medium-term duration/maturity of fixed income investments provides opportunities for investors to re-invest maturing bond investments in a gradually rising interest rate environment or lock in their investment if rates stay persistently low in the next three to five years,” he said.

An investor can also add stocks to his/her portfolio to protect it from unexpected rise in inflation, Ravelas said. Based on several studies, Ravelas noted that stocks—while more volatile than bonds—could provide higher returns than bonds over the long-run.

“Therefore, having an exposure of stocks (whether direct securities or combination of mutual funds) ranging from 10-20 percent puts the overall portfolio in a position to take advantage of the base case scenario and as well as protect the portfolio in a worst-case event,” he said.

“Lastly, adding more asset classes in the form of alternative investments such as commodities, real estate investment trusts, enhances the investor’s portfolio by reducing the volatility of the investments but at the same time enhancing the overall yield of the portfolio. The key to navigating one’s investment portfolio in a volatile and uncertain financial environment is simply to diversify, diversify and diversify.”