Investing in the Philippine Stock Exchange

A recent survey in the United States showed that most people believe that real estate is the best long-term investment. Thirty-six percent of Americans think that investment in real estate will yield the best long-term results financially, versus other investments in stocks, gold, savings accounts, and bonds.

The same article goes on to show that they may be wrong -- as historical data reveals that over the last 30 years, from 1990 to 2020, stocks have given a return of 1,325 percent compared to 308 percent for real estate, based on the S&P 500 and the U.S. National Home Price Index, respectively.

In the past seven years, from 2017 to 2023, the S&P index increased by 109.27 percent versus 58.67 percent for home prices.

In the Philippines, for the period 2017 to 2023, an investment kept in residential real estate would have provided a return of 37.6 percent compared to -11 percent for stocks for the same period (based on the PSEi Index). Though, for the 30-year period of 1990 to 2020, the PSEi index did perform better with an increase of 584 percent, or from 1,052 to 7,200.

The Philippine experience, at least for the past seven years, seems to show the opposite, where investing in real estate would have given a better return than investing in the stock market.

Part of this trend is probably due to the cultural bias of Filipinos that real estate or property is a much safer asset and the fact that Filipinos value strong family ties.

Many Filipinos have the goal of acquiring an asset that they can hold and eventually pass on to their children and loved ones. One of the most common strategies of real estate brokers to convince potential buyers is that a house or land will be one’s legacy to their children.

Investing in stocks only represents an intangible asset, and is not generally considered an asset that will be passed on to one’s children or loved ones.

Notably, while investing in the stock market is usually viewed through the lens of individual financial gain, its impact extends beyond personal portfolio and personal gain. The stock market plays a crucial role in the broader economy of the country.

By channeling funds into businesses or listed companies, fostering innovation, and creating jobs, investment by the people in the stock market can be considered a vital driver of economic prosperity for the country.

A well-developed and active stock market will have the following positive contributions to the country:

1. Capital formation, business expansion, job creation, and income generation

A company listing in the stock market has the ability to facilitate capital formation and accumulation. Listed companies that receive money from subscription of shares can utilize the funds for their operations, pay down loans, expand their business, and develop new products.

These activities lead to job creation and business activity for suppliers and service providers of the company which in turn generate their own increased business activity and contribution to the economy. Lower unemployment and increase in the earning population also generate consumer spending which benefits the economy.

2. Encouraging innovation and technological advancement

Most businesses are capital-intensive and require capital and money to carry out research and development. Providing companies with the funds to invest in the development and trial of new products and services increases activity in the economy.

3. Contributor to economic growth and stability

A robust stock market contributes to economic stability and growth. It provides companies a platform to raise capital efficiently and at a lower cost compared to other methods, such as bank loans and issuing bonds, which require the company to pay interest.

4. Wealth distribution and financial inclusion

The stock market allows greater financial inclusion, especially these days as buying and selling stocks can be done online and through mobile applications. When more people invest in the stock market, it encourages them to save up and invest their money to purchase stocks. When people earn from their investments, they will then feel wealthier and be inclined to spend some money increasing consumption and the Gross Domestic Product.

Moreover, buying stocks in the stock market requires minimal investment. One can purchase stocks for a few thousand pesos and investors can invest every month from money set aside from their salary. This is compared to purchasing property which requires a much larger investment, especially now given the high prices of real estate in the country.

Aside from the price appreciation of the stock, many companies in the Philippine Stock Exchange provide decent cash dividends. For 2024, some examples are:

Notably, these companies may still pay additional cash dividends for the remainder of 2024.

Compared to our Asean neighbors, it can be said that the Philippine stock market generally has a low participation rate among the population.

The Philippine Stock Exchange reported about 1.71 million market accounts in 2022.

More than a million accounts may seem like a big number, but this is low compared to our Asean neighbors since the Philippines has a population of about 115 million as of 2022.

Vietnam, which has a population of about 99 million, reported a total number of securities trading accounts of about 7.53 million units as of February 2024, according to data from the Việt Nam Securities Depository (VSD).

Thailand which had a population of about 71 million as of 2021, had a total of 4.67 million trading accounts in 2021.

The low number of stock market investor trading accounts in the Philippines is probably one of the reasons, although not the only or biggest reason, affecting its performance. For 2016 to 2023, the following chart shows the year-on-year performance of the Philippine Stock Exchange compared to our Asean neighbors.

Of course, investing in the stock market is not a guarantee of being able to earn, as the stock prices fluctuate up and down. Moreover, some stocks will consistently perform better than others even during a down market.

While investing in property seems to be a more favorable option in the Philippines, we should also encourage Filipinos to invest in the Philippine Stock Exchange. This would not only promote financial inclusion as it would contribute not only to financial inclusion for more individuals but also to the benefit of the entire Philippine economy.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)