Saturday, 24 July 2010

Buy the Philippines

Written by John Mangun
Outside the Box
Business Mirror

If you ask the average person and sometimes the average economist about the stock market, you should be prepared for a lot of negative comments. The general attitude, especially now a days, is that buying stocks is somewhere between buying lotto tickets and playing at the casino.

The stock market is different from any other investment vehicle for two reasons. An investment in shares is perhaps the only investment that is always instantly convertible into cash. No waiting to find a buyer for your investment. No contract signing, no lawyers, and a very visible pricing mechanism available to everyone. Further, the shares you buy represent a tangible revenue-generating asset; a functioning corporation that is doing business every day.

Why then would the stock market have such a bad reputation? Primarily because people who buy stocks do not have a clue about how to do it profitably. The biggest mistakes that the average investor makes is viewing stock prices as a mirror, a reflection of the current general business and economic climate rather than a predictor of future economic and business activity.

During the last quarter of 2008, the outlook seemed very bad for the world and the Philippines. This was a time of the depth of the world’s stock markets and a time when people were really starting to realize how bad things were and how bad things were going to become. Yet buying shares of Ayala Corp. at the end of November 2008 and holding that investment until now would have nearly doubled your money.

But that is Ayala and buying stock in a company like that probably always does well over the longer term. Who in his right mind back then would have bought shares of a bank, for example? Only someone who wanted to make a 100-percent profit. At the end of 2008, Banco de Oro traded at P22. Now it is selling at P45.

But even BDO may not be a fair example, as that company also is part of a very wealthy group. OK. How about Southeast Asian Cement? End 2008 price was P0.30; 2010 price nearly P1.

The Philippine Stock Exchange (PSE) has been a profit gold mine over the last 18 months. Megaworld from P0.65 to P1.50+. Pepsi-Cola Philippines from P0.85 to P2.85, Universal Robina Corp. started at P6 and is now P30. And maybe the most incredible profit generator—JG Summit—from P1.60 to P16.

Had you bought a weighted portfolio of all the companies listed on the Philippine Stock Exchange Index at the end of 2008, your investment would have increased by 80 percent.

So now in 2010, having missed one of the best market rallies in the history of the Philippine stock market, who would be crazy enough to buy now after prices have gone up so much? Only someone who wants to make a lot of money over the next 12 months.

Read what one foreign market watcher said last week: “Asia and other emerging markets are more upbeat. India and Indonesia made slightly new highs last week. The breakouts were only marginal. But Thailand and Philippines made clearly higher highs, suggesting a growing bull trend in Asia, giving hope for emerging markets and perhaps the global trend.”

Are you joking? Thailand just went through months of political chaos and everyone knows the Philippines is a basket case and yet these two stock markets may be the leaders of a positive global trend?

How in the world could anyone justify enthusiastic optimism about the Philippines and the Philippine stock market?

By the end of 2010, the Philippines will stand unique among the world’s nations (next to China, for example) by being foreign debt free. Well, we won’t but we could, if we wanted to. The Philippines will be holding enough foreign currency to pay off all of our government’s foreign currency-denominated debt. Think about that. After all these years, the Philippines does not have to owe the foreigners any money. Sure, the government will borrow domestically but that is a completely different proposition than being forced to borrow in the international financial markets just to survive.

The Philippines is so financially sound in the eyes of the global financial markets, that now the government can raise money, borrow and pay back the loans in pesos. Think about that, too. Foreigners are willing to loan us money payable in five years and be paid back in pesos! Yes we will pay a slightly higher interest rate than Japan, for example. But the global financial markets are not worried about a Philippine economic reversal or the peso dropping like a rock. Too bad more Filipinos do not feel that way.

This positive situation will have a very significant impact on the economy on everything from interest rates to direct foreign investment.

Another reason the stock market is going to continue to go up is that listed companies are making big profits. The combined net earnings of all PSE-listed firms increased by more than 100 percent in the first quarter of 2010. That’s good but this is better. Company revenues went up by 28 percent. That 28 percent shows the underlying strength of the Philippine economy. That revenue growth is not from the sale of assets. It is solid business growth. In this environment, when a local bank like Metrobank shows a 28-percent increase in profits in the first quarter, you know that the economy is sound and the financial system strong.

For 15 of the last 18 months, the PSE has gone up. Amid all the global gloom, Philippine politics and natural disasters, the stock market has not stopped its climb. And the climb is going to continue, through the highs of 2007 and beyond. How far you ask? Based on the Price/Earnings Ratio (PER), many prices of shares on the PSE could double and more.

Buy the peso. Buy the PSE. Buy the Philippines.

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