Why stay invested in stocks?
It’s easier to be bearish than to be bullish nowadays, especially with the numerous threats facing both the global and the local economy. These include elevated interest rates, rising oil and food prices and slowing economic growth.
I have also been vocal in expressing my views that rallies in the market might not be sustainable in the short term because of these numerous threats. However, why do I tell investors to maintain a portion of their assets in stocks?
Stocks are very cheap
Stocks are very cheap today, with the Philippine Stock Exchange index (PSEi) trading at only 10.6X price-to-earnings ratio (P/E). This is way below its 10-year historical average P/E of 16.5X. In fact, the said multiple is more than two standard deviations below the mean, implying that the odds the PSEi will trade at a higher multiple going forward is very high.
Individual stocks are even cheaper, with some stocks trading below 10X P/E. Others are also trading below their book values, even though their assets are undoubtedly worth significantly more and the likelihood of bankruptcy is almost nonexistent.
Because of local stocks’ cheap valuations, many companies have launched share buyback programs. Insiders are also buying back their stocks. Finally, many companies are choosing to delist.
Eagle Cement already delisted in February while Metro Pacific Investments Corp. is in the process of delisting. Although Metro Pacific’s existing principals and its new investor Mitsui offered to buy publicly owned shares around 40-percent higher than the company’s market price in April, the tender offer price is still significantly lower than its fair value, in our opinion.
No one knows where the bottom will be
Although I am not discounting the possibility that prices of stocks can still go down and that stocks can stay cheap for a very long time, catching the market bottom is an impossible feat even for the best fund managers.
Because of this, it is impossible to buy stocks at the lowest price. Buying them at a huge discount to their fair values is already a huge advantage for investors with a long-term investment time horizon.
Many stocks provide attractive cash dividends
It is very tempting to just stay in cash right now given high interest rates. However, the high rates that banks offer will not last forever. Moreover, many stocks already provide reasonable dividend yields, paying investors to be patient as they wait for prices to return to more normalized levels.
After all, when interest rates go down, stocks will be among the major beneficiaries, rewarding investors who own them through capital appreciation.
Potential to miss out when bull market finally begins
It usually takes time before investors participate when a bull cycle begins. This is not surprising as economic indicators remain very weak during the early stages of a bull market, raising investors’ level of skepticism toward any market rebound.
Moreover, due to the significantly thin value turnover that characterizes early-stage bull markets, recoveries tend to be very sharp.
Consequently, by the time investors are convinced that a bull market is underway, share prices can be much higher than where they are today.
To end, I’d like to leave you with this quote from one of the world’s most successful stock market investors, Warren Buffett: “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
With the very cheap valuations of stocks, now is the time to be greedy and to capitalize on the opportunity to accumulate shares of blue-chip companies at bargain prices. Once risks fade and conditions normalize, stocks will be worth much more, rewarding investors with a long-term investment time horizon with significant returns. INQ