Should I convert my dollars to stocks?
QUESTION: The stock market has been performing quite well lately and I feel like I am losing a lot of opportunities to make money by keeping my savings in a dollar account. I want to sell my dollars right now but I might incur some losses because I bought them at a higher rate. What should I do? —RA Castillo by email.
Answer: Exactly one year ago, I wrote in the column titled “Should I convert my dollars to pesos?” that it is wise to sell your US dollars for pesos because it may depreciate further as the US is likely to print more money rather than raise new taxes to pay off its maturing loan obligations.
This column also recommended that it will be good to sell on strength when the US dollar recovers to around P44 to $1.
Well, guess what? Before 2011 ended, the exchange rate indeed rallied to P44.2 to $1 and this was sustained until January of this year.
But since then, the US dollar has already lost 6 percent and is currently trading at P41.6 to $1. While it may still recover, there is no guarantee that it will go back to the Ph44 to $1 level in the very near term.
Last month, the US Federal Reserve announced that it would print more money through the use of the unconventional monetary tool called Quantitative Easing or QE3 to stimulate the US economy.
It is non-traditional because normally when an economy is slowing down, the central bank or the US Fed would cut interest rates to encourage banks to lend and create new investments.
But ever since the US financial crisis began, interest rates have been cut consistently that it cannot go any lower anymore. In fact, the Fed rate at the moment is almost zero.
So the US Fed came up with an innovative idea in which it will just create money out of nothing like magic and use this money to buy up the non-performing assets of the banks so that the proceeds from the sale could be used by banks as additional cash to lend more.
Moreover, pumping more money into the system also lowers the long-term interest rate so that it makes borrowing cheaper for ordinary American consumers to buy a house, for example.
In theory, the series of easing measures of QE3 is aimed at helping boost consumer spending and facilitate the US economy to recover.
This latest move is called QE3 because this is already the third time that this tool has been used by the US Fed since 2008.
About $1 trillion has been created by the Fed from QE1 and QE2 combined to buy out long-term Treasury securities from banks and financial institutions.
So far, the impact on the real economy of US has been minimal, prompting the US Fed to do a third one but this time with more regular printing, estimated at $40 billion per month and take note, without a deadline.
Just imagine, with the massive increase in dollar supply in circulation, there is strong pressure for the US dollar to fall further.
The US dollar exchange rate already registered its 10-year new low of P41.4 to $1 this month.
How low can it go? Your guess is as good as mine.
If you have dollar holdings, it may be good to sell and use the proceeds to invest somewhere else.
Now there is an observation that many US banks are still scared to lend money to businesses, fearing that they may not be able to get their money back due to the slowing economy. And with QE3 in effect, interest rates of long-term Treasury securities are also declining.
This leaves US banks and financial institutions with limited options but to invest their excess cash into the stock market in the US and Asia, particularly the emerging markets where the Philippines luckily happens to be one of the heavily favored economies.
This excess liquidity from QE3 is one of the factors supporting the current bull run in the Philippine stock market.
Although share prices are relatively expensive at this point with high P/E valuations, market players say that higher earnings growth in 2013 will bring down prospective P/E valuations.
This makes current share prices still attractive for more upside if you will look at next year’s valuation rather than this year.
In an environment where the market is awash with cash and interest rates are falling, it is easy to be optimistic about the stock market. There is always a story to tell that will justify buying a stock.
Yes, you can invest in stocks by taking advantage of the strong momentum brought about by excess liquidity in the market, but you need to be extra careful in selecting the right stock.
What is the story behind the stock that makes you want to buy it? How does it relate to its earnings next year? How probable that this will happen and why? Is the stock price’s initial rise supported by strong volume? How much is the target price? Is there foreign buying into the stock?
Ask yourself these questions to help you screen stocks with good potential.
If there is no opportunity to invest in stocks because you find it risky and expensive, you can try investing in real estate. Falling interest rates make property investment attractive.
You can use your cash as down payment and finance the balance by borrowing from the bank at low interest rate. You can make money by renting it out or selling it later at higher price.
Excess liquidity may soon find its way to Philippine property market, especially the condominium segment where foreigners can buy.
(Henry Ong is a registered financial planner of RFP Philippines. Attend our free personal finance talk and learn how to become RFP on Oct. 24, 7 p.m. at PSE Center Tektite Tower. Register your slot now at [email protected] or visit www.rfp.ph).
