Who doesn’t want to leave their loved ones happy when the grim reaper calls?

Our legacy is the only thing that will comfort those we leave behind. And part of that legacy is our estate, which, if we plan well, will benefit our loved ones according to our wishes.

Wanda Beltran, Metrobank’s Head of Account Management, who’s been taking care of the financial affairs of many shrewd and hard-to-please high-net-worth individuals, lists some common pitfalls.

1. Focus on the beneficiary and tax.

There’s just no way to escape taxes even when we pass on. And because we don’t want to pay more than we must, some of us may seek to avoid taxes, especially since we want our beneficiaries to get more from our estate.

Beltran said that some people do fall into this trap by transferring ownership of their assets to their beneficiaries too soon. One manifestation of this is when business owners decide to convey most of their shares to the next generation, thinking that their children will continue to honor them as the heads of their companies.

“That may not always be the case. There is nothing that will stop the children–who are now majority owners of the company–from booting out their parents if they want to,” said Beltran.

Another example is when parents buy properties and put them under the names of their children.

“But what if the children marry and the marriages don’t work out?” said Beltran. “It would have been better if the property was given after the children got married, because the property would be theirs even if their marriages failed.”

2. Focus on death.

Others focus on death, such that they only want their assets to be transferred when they die. Perhaps they subscribe to this improvident idea that what happens after they are gone is of no consequence to them.

After all, they won’t be around to witness the repercussions of their action or inaction.

There are certainly those who find it hard to let go. And with the TRAIN (Tax Reform for Acceleration and Inclusion) law now setting both the estate and donor’s tax at 6 percent, it may seem that there is no benefit to transferring assets within one’s lifetime.

What people fail to realize is that paying 6 percent for donor’s tax today is better than paying a 6-percent estate tax for property that would likely have gone up in value, such as real estate.

“Now for those who don’t care, they only need to read about the horror stories involving the dissipation of estates due to litigious family disputes,” she said.

3. Failure to consider present needs.

Sometimes we opt for what is convenient rather than what is appropriate. Beltran cited as an example the practice of using the “or” for certain joint bank accounts.

What if the person who put in most of the money gets sick or suffers from a stroke? The other joint account holder will be able to get all the money easily. When the patient wakes up, he is left with an empty bank account.

“It’s sad that people don’t think of their present needs without considering the risks,” said Beltran.

4. No further accumulation of wealth.

“If you plan to leave something behind to your heirs, shouldn’t you be concerned about the proper management of these assets?” asked Beltran.

Take the case of the husband who left a huge sum of money to his wife when he passed away, owing to a generous insurance policy. But then the wife had zero knowledge of investment. Soon the money was all gone, and nothing was left even for the education of the children.

If the family has no expectation of accumulating wealth or having a reliable income stream, there has got to be some plan to manage the assets.

5. Resort to tax evasion schemes.

There is a need to stamp out this mindset of tax evasion among some people. Perhaps it was because estate taxes were once as high as 15 percent. If you had a PHP 50-million estate, that would have been PHP 7.5 million in estate tax.

“Recently, however, people have become more compliant and law-abiding because of the TRAIN law,” said Beltran.

Knowing these pitfalls when planning for your estate is one thing; doing something about them is another.

If you want to do estate planning right, talk to your financial services provider, and start that conversation.

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir. 

(UPDATE: Since its first day of trading in the secondary market, the yield of RTB 5-16 has traded higher from its coupon of 5.75% to 6.345% now, based on the indicative offer yield as of Sept. 14, 2022. This is as investors sold off the 5.5-year bond to trim risk positions in this tenor bucket, in anticipation of even bigger rate hikes by the BSP, and in turn, higher yields. With the yield pick-up of over 50 basis points in one week, we think that RTB 5-16 is a good buy at current levels, particularly at 6.30% or better.)

The government recently offered retail treasury bonds called RTB 5-16. With a tenor of 5.5 years and a coupon rate of 5.750%, these bonds may be a good addition to your portfolio.

Here’s why.

RTB 5-16 versus shorter-term bonds

As the Bangko Sentral ng Pilipinas (BSP) has signaled further rate hikes for the year, we continue to expect a “flattening” of the peso yield curve. This means the yields of short-term bonds are becoming much closer to the yields of long-term bonds.

This is not usually the case because when you tie up your money for a longer time in an investment, the yield or return is us

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) continued its upward trend, rising by 164.2pts (up 2.45% week-on-week) to close at 6,863.86. The market enjoyed five straight days of foreign net buying amid the better-than-expected OFW remittances and the widely expected 50-basis-point rate hike of the Bangko Sentral ng Pilipinas. The market was bought up in four out of five trading days last week, correcting only on Wednesday following overbought signals.

Top index performers were Alliance Global Group Inc. (AGI) which was up 10.7%, BDO Unibank up 9.3%, and Megaworld Corporation (MEG) up 8.2%. Index laggards were PLDT (TEL) down 2.2%, San Miguel Corporation (SMC) down 1.9%, and Jollibee Foods Corporation (JFC) down -1.7%. The index breadth was positive with 20 gainers versus 10 losers. The average daily turnover value was PHP 6.5 billion. Foreigners were net buyers by PHP 3.2 billion.

WHAT TO EXPECT THIS WEEK

The market may pull back this week, as its relative strengthe index (RSI), a momentum indicator, continues to trade above 70, indicating overbought conditions. After consecutive weeks of price rollbacks, fuel prices are also projected to increase by over PHP 2 per liter for diesel and kerosene and around PHP 0.40 to PHP 0.70 per liter for gasoline. Meanwhile, investors are expected to feel some relief over sugar prices as leading groceries and supermarkets in Metro Manila agreed to the suggested retail price of PHP 70/kg of sugar.

STOCK PICKS FOR THE WEEK

Jollibee Foods Corp. (JFC) — BUY

Despite cost pressures, earnings recovery appears to be sustainable and continues to gain traction. We expect JFC will be able to deliver a 19.8% revenue compounded annual growth rate (CAGR) for 2022 to 2023, amid the further unwinding of COVID mobility restrictions and with JFC’s markets so far able to absorb price increases year-to-date. Accumulate on pullbacks until PHP 225.00. Set cut loss below PHP 208.00 and take profit at PHP 250.00/ PHP 260.00.

Robinsons Retail Holdings, Inc. (RRHI) — BUY

Amid a rising inflation environment, we turn to retailers, given their ability to pass on costs to their mid- to high-income target market. RRHI is best positioned to leverage on the wallet share shift and return of mobility amid further economic reopening. Despite the Omicron impact and post adjustments to margins, we retain our forecasts for RRHI, as our outlook for the mall-based retailer remains largely intact amid: (i) favorable mobility trends and shifting wallet allocation conducive for RRHI’s growth; and (ii) Strong balance sheet position. Accumulating once RRHI pulls back to PHP 60.00 is advisable. Set stop limit orders below PHP 57.50 and take profit at around PHP 68.00/PHP 70.00.

Universal Robina Corp. (URC) — BUY

URC formed a “megaphone bottom pattern” – a long-term bullish pattern. URC broke above the said pattern due to the broader market rebound amid easing commodity prices. According to Technical Insight, our automated chart pattern recognition program, the measured price target after URC broke out of its megaphone bottom pattern is PHP 150.00 – PHP 156.00. As for fundamentals, we are constructive on the stock and view the current levels as good entry points. We expect margins to recover strongly next year. As commodity prices continue to ease, price increases are likely to remain sticky, and the Philippine peso is likely to stabilize. For 2023, we expect URC to be able to deliver 21%/16% growth in EBIT/net earnings amid the full-year impact of the said factors. Accumulating URC at current levels is advisable. Set stop limit orders below PHP 112.00. Take profit at around PHP 140.00/PHP 150.00.

PSEi TECHNICAL ANALYSIS

Resistance: 6,800

Support: 6,400 to 6,180

The PSEi sustained its rally last week and is poised to retest the 200-day moving average (MA) for the first time since April 2022. The technical indicator moving average convergence divergence (MACD) confirms the bullish momentum, trading at its highest since July 2021. However, the market is now trading at overbought levels with RSI at 73.97.

TRADING PLAN

Accumulate once the PSEi pulls back to around 6,800 to 6,600. Set tight stops below 6,400.

KEY DATA RELEASES

Tuesday, August 23, 2022
– US S&P Global preliminary manufacturing purchasing managers’ index (PMI)

Thursday, August 25, 2022
– US second reading of annualized GDP quarter-on-quarter (consensus estimate: -0.9%, 1st reading: -0.9%)

Sunday, August 28, 2022
– Philippine bank lending net of reverse repurchase rate (RRPs) year-on-year (12% in July 2022)

At the beginning of the year, Russia’s conflict with Ukraine led to sanctions on the former, one of which was the banning of its oil and gas exports to the United States and the European Union, among others (see our article here which highlights the EU’s dependence on Russia for energy).

Russia exported the greatest amount of oil globally before the invasion, and was the second biggest in terms of exporting crude oil, next to Saudi Arabia. Moreover, as the US and Saudi Arabia were the top two producers of oil, Russia followed suit.

The conflict between Russia and Ukraine led to supply chain bottlenecks especially for energy commodities, which translated to higher prices globally because of limited supply relative to demand. The rise in energy prices which directly affected the prices paid by households or individuals for their energy consumption can be described as the first-round effect of inflation.

Second-round effects come into play when markets adjust from supply side pressures like rising energy prices. This happens when firms implement higher prices and pass on the higher energy costs to consumers, even for non-energy goods or services such as food, retail products, transport, etc. which use energy commodities as inputs.

For instance, higher energy costs may elevate transportation costs of goods and inputs needed by businesses, which in turn result in higher prices of their products. Workers may also demand higher wages to compensate for the higher consumer prices stemming from price shocks brought about by energy commodities.

In the Philippine context, second-round effects have manifested largely during the second quarter of this year. For instance, transport groups have already filed a petition for an increase in minimum fares.

Meanwhile, higher minimum wages already took effect in 17 regions in July. In addition, prices of food and non-alcoholic beverages have been accelerating faster every month, especially during the second quarter.

The year-on-year growth of the Consumer Price Index (CPI) or inflation rate of the food and non-alcoholic beverages and transport groups, which are among the top three highest contributors to inflation since March 2022, have significantly intensified from the pre-supply shock period of February 2022 when the inflation rate was at the lowest since November 2020. (Source: Philippine Statistics Authority)

As seen above, the CPI of electricity, gas, and other fuels substantially climbed year-on-year by 17.4% in March (from 12.8% in February) after Russia’s invasion of Ukraine in February. Moreover, while the CPI of electricity, gas, and other fuels started to decline y-o-y in May 2022, the CPI growth of the food and non-alcoholic beverages and transport groups maintained an upward trend.

This can be attributed to second-round effects, as the higher energy prices in previous months were passed on to the prices of non-energy goods and services consisting of food and transport, among others, which use these energy commodities as inputs.

Should price pressures from the supply side persist (i.e., higher energy prices), second-round effects may be sustained, leading to further increases in wages and transport costs, which in turn would spill over to the rest of a consumer’s basket of goods and services, not only limited to energy and food products.

In addition, elevated inflation expectations in the coming months may lead to requests for bigger wage hikes, and in turn, businesses may impose higher prices for their goods and services to cover for these higher wages, which may lead to a dangerous upward spiral in inflation.

Thus, second-round effects as well as heightened inflation expectations may elevate inflation even more in the near term, and this may put pressure on the BSP to stay hawkish in the coming months to stabilize prices.

ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.

With the July 2022 inflation rate of 6.4%, the highest since October 2018, higher inflation expectations are prompting further tightening of policy rates as signaled by the Bangko Sentral ng Pilipinas (BSP) in their recent statements.

Considering further rate hikes on the horizon to support the peso and given heightened inflation expectations, along with the recently released 7.4% GDP growth for the second quarter, we have revised our forecasts:

For more information, please download our full report here.

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) enjoyed an upbeat week, surging 4.6% week-on-week to close at 6,699.66 (up 249.16 pts). The market rallied for five straight days amid generally improving market sentiment following better-than-expected US consumer price index (CPI) at 8.5% — signaling a potential slower pace of US Fed rate hikes. Moreover, Fitch Solutions has raised its gross domestic product (GDP) growth forecast for the Philippines to 6.6% for 2022 from 6.1% previously, further lifting investor sentiment.

Top index performers were Globe Telecom (GLO) up 11.4%, GT Capital (GTCAP) up 10.9%, and Wilcon Depot (WLCON) up 10.7%, while index laggards were Converge (CNVRG) down 4.1%, AC Energy (ACEN) down 1.8%, and Bank of the Philippine Islands (BPI) down 0.5%. The index breadth was positive with 27 gainers versus 3 losers. The average daily turnover value was PHP 6.2 billion. Foreigners were net sellers by PHP 11 billion.

WHAT TO EXPECT THIS WEEK

The market is expected to continue its upward momentum at the earlier part of the week amid investors’ growing optimism. However, investors will still be closely monitoring the Bangko Sentral ng Pilipinas’ (BSP’s) interest rate decision that will be announced on Thursday, August 18, 2022. The market has been expecting another 50-basis-point rate hike, even before last week’s announcements involving the inflation slowdown in the US and the lower-than-expected Philippine GDP.

STOCK PICKS FOR THE WEEK

D&L Industries, Inc. (DNL) — BUY

The significant growth in DNL’s first half 2022 sales (up 17% year-on-year) reflected the company’s ability to pass on higher costs to its customers. The high-margin specialty products segment is seen to recover amid the absence of quarantine measures and the easing of selling prices of commodities (i.e., coconut oil and palm oil). Moving forward, the completion of DNL’s Batangas plant in January 2023 will support the company’s growing export business in the food and oleochemicals segment. Accumulating DNL once it breaks above PHP 7.40 is advisable. Those more conservative can accumulate once DNL breaks above PHP 8.00. Set stop limit orders below 5%-7% of the average cost. Take profit at around PHP 9.00

Bloomberry Resorts Corp. (BLOOM) — BUY

Casinos, especially BLOOM, are poised to benefit from the policy to allow vaccinated foreigners to enter the Philippines as well as the reopening of borders across Asia. Similarly, the Philippine government’s stance of not implementing lockdowns moving forward allows BLOOM to resume its activities to full capacity, which will further improve the company’s mass table and electronic gaming machine (EGM) volume. Accumulating once BLOOM breaks above PHP 7.20 is advisable. Set stop limit orders below PHP 6.80. Take profit at around PHP 8.20 to PHP 9.00.

DMCI Holdings, Inc. (DMC) — BUY

On the daily chart, DMC is still on a clear uptrend and bullish momentum is prevalent. Looking at fundamentals, for SCC, DMCI Power, and DMCI Mining, these companies are expected to sustain their earnings growth this year as coal sales volume and energy prices remain elevated due to the ongoing global supply disruptions and surge in demand. For DMCI Homes, management expects sales to improve and cancellations to taper as the economy recovers. Accumulate at current levels after the stock breaks above PHP 9.85. Set cut loss below PHP 9.35 and take profit at PHP 11.30/PHP 12.50.

PSEI TECHNICAL ANALYSIS

Resistance: 6,800

Support: 6,400 to 6,180

The PSEi sharply rallied last week on above average volume, confirming the break above 6,400. The PSEi is also trading above both the 50-day and 100-day moving averages (MAs) for the first time since February 2022. However, the market is currently trading near overbought levels with the relative strength index (RSI) indicator at 69.86.

TRADING PLAN

Accumulate once the PSEi pulls back to around from 6,600 to 6,500. Set tight stops below 6,180.

KEY DATA RELEASES

Tuesday, August 16, 2022
– Corporate Earnings: GT Capital Holdings, Inc. (GTCAP)

Wednesday, August 17, 2022
– overseas Filipino (OF) remittances year-on-year for June 2022 (consensus estimate: 2.8%, actual: 1.8% in May 2022)
– Corporate Earnings: Security Bank (SECB)

Thursday, August 18, 2022
– BSP interest rate decision (BSP estimate: +50 bps)

Friday, August 19, 2022
– Overall balance of payments (BOP) position
– Corporate Earnings: Jollibee Foods Corp. (JFC)

The Russia-Ukraine conflict has brought to light the European Union’s (EU’s) dependence on Russia for energy. In 2020, 29% of extra-EU’s crude oil, 43% of natural gas, and 54 % of solid fossil fuel imports were sourced from Russia. With the sanctions imposed on Russia and the end of the war still far from sight, the EU’s energy crisis has triggered volatility in the energy market, pushing up global energy commodity prices.

So far, the EU has shifted to liquefied natural gas (LNG), increasing its imports to compensate for the Russian supply. Meanwhile, Germany is set to revive its coal plants, while other European countries have started boosting their coal imports in preparation for winter, adding to the demand of coal-dependent countries like us.

We already know the drill: a rise in demand will pull up market prices if supply can’t keep up. The EU currently sources coal from Australia, South America, Colombia, and South Africa, while the Philippines mainly imports from Indonesia (98% of coal imports in 2021). Nonetheless, the EU’s entry into the group of countries needing coal and LNG, apart from the supply chain issues faced globally, tightens the global market, leading to higher prices.

This is why, despite efforts to minimize energy consumption, a typical Meralco bill this month might still be the same, or probably be even higher. Coal covers 33% of Meralco’s Power Distribution Utility Fuel Mix (as of 2021) next to natural gas at 49%. But based on statistical analysis, Meralco’s generation charge is more sensitive to coal prices than natural gas.

Natural gas and coal make up more than four-fifths of Meralco’s power distribution utility fuel mix, though the price of electricity generated is more sensitive to the price of coal.

The price of Indonesian coal, which is the country’s primary coal source, has been on the rise since last year (see chart above). On top of that, unlike natural gas, coal is paid in dollars, so there’s also the impact of peso depreciation.

In Meralco’s June 2022 generation cost computation, the average generation cost per kilowatt-hour (kWh) from three coal plants has gone up by 71% compared to last year, pushing up the generation charge for the month. Therefore, as the EU warms up for winter, the Philippines should brace for higher energy prices, especially if a colder winter is forthcoming.

Transition to LNG

While the EU shifts back to coal and pursues other energy sources in preparation for winter, the Philippines faces its own energy problems. With the Malampaya service contract set to expire in 2024 and its natural gas supply to be completely exhausted by 2027, it is a critical time for the country to find other sources to cater to the rising energy demand of Luzon, especially amid rising coal prices.

The good news is, at least in the short run, the Philippines is set to import LNG as the country’s first LNG terminal begins operations this year, and construction of other terminals is underway. The bad news is, the Philippines will likely enter the LNG market at a time when prices are still high as prompted by the EU’s shift to LNG. Moreover, dependence on imports puts the country in a vulnerable position, especially in periods of volatility. Nonetheless, this is the solution for now.

In the long term, there are plans to build new power plants and tap renewable energy sources to improve the country’s energy mix to increase production and meet rapidly increasing demand. It is high time to source for sufficient financing and private sector investment not only to meet current demand but also to push for energy independence.

INA CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) rose by 89.57 points (up 1.42% week-on-week) to close at 6,405.50. The market initially fell on Monday as investors assessed the country’s lower manufacturing Purchasing Managers’ Index (PMI) at 50.8 for July 2022 (from June 2022’s 53.8).

The benchmark index rose in the days that followed amid the following factors:

(i) Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla’s comment that the Consumer Price Index (CPI) may have peaked in July as well as his reiteration of a 25- to 50-basis-point (bp) rate hike in August;

(ii) partial easing of geopolitical uncertainty after US House Speaker Nancy Pelosi left Taiwan; and

(iii) some rosy second quarter 2022 earnings results.

However, the PSEi fell again on Friday after the faster-than-expected July 2022 inflation print at 6.4% (consensus estimate: 6.1%; BSP estimate: 5.6% to 6.4%).

Top index performers were Ayala Corporation (AC) which was up 12.4%, Monde Nissin (MONDE) up 11.0%, and Universal Robina Corporation (URC) up 6.5%. Index laggards were Security Bank (SECB) which was down 9.4%, Meralco (MER) down 7.1%, and Alliance Global Inc. (AGI) down 5.9%. The index breadth was positive with 17 gainers versus 13 losers. The average daily turnover value was PHP 6.7 billion. Foreigners were net buyers by PHP 747 million.

WHAT TO EXPECT THIS WEEK

The PSEi is expected to trade sideways as investors await more earnings results as well as the slew of local data releases including the much awaited second quarter 2022 GDP reading. BSP Governor Felipe Medalla has also signaled the higher likelihood of a 50-bp rate hike rather than 25 bps for August after the higher-than-expected July 2022 inflation rate. In addition, major fuel price rollbacks expected this week may partly lift investor sentiment.

STOCK PICKS FOR THE WEEK

Bank of the Philippine Islands (BPI) — BUY

We see room for BPI’s loan growth to catch up amid the country’s sustained reopening, encouraging demand for corporate loans, and continued usage of credit cards among clients. As for higher asset yields, management said it is confident that a 25-bp rate hike can be fully passed on to corporate borrowers, with other customers able to absorb higher rates of up to a 100-bp increase. Accumulate once the stock breaks above PHP 95.60. Set cut loss below PHP 90.00 and take profit at PHP 106.00.

Metro Pacific Investments Corp. (MPI) — BUY

For Manila Electric Co. (MER), we expect the company’s energy sales to reach pre-pandemic levels as power demand continues to recover with the reopening of the economy. For the toll segment, management said that revenge travel during the summer months was able to offset the impact of rising fuel prices. Management added that the return to on-site work and face-to-face classes will further boost the toll road segment’s volume recovery. As for the light rail business, the segment is expected to further pare its losses as operating capacity is now at 100% since March 2022. Accumulating MPI once it breaks above PHP 4.00 is advisable. Set cut loss below PHP 3.65. Take profit at around PHP 4.50/ PHP 4.60.

Semirara Mining and Power Corp. (SCC) — SET TRAILING STOPS

SCC’s guidance for the next quarters is less optimistic. It said that the first half of 2022 will be anemic because of market volatility and unfavorable weather conditions. Coal shipments are also expected to normalize as China shifts to cheaper Russian coal. Given that SCC has rallied by 88.5% year-to-date, profit taking can quickly occur especially given the volatile market environment. Take profit once SCC trades below its 8-day/9-day EMAs, or Exponential Moving Averages, (~below P40.50). The next support levels are PHP 37.00/PHP 36.10

PSEI TECHNICAL ANALYSIS

Resistance: 6,400 / 50-day moving average price (MA)

Support: 5,700 / 6,180

For the first time since March 2022, the PSEi has broken above the 50-day Moving Average (MA) price. The market is also now trading above 6,400. The MACD, or Moving Average Convergence Divergence, is also trading above both the zero and signal lines for the first time since February 2022. The PSEi must stay above 6,400 and the 50-day MA for the rebound to be sustained.

TRADING PLAN

Slowly accumulate as the PSEi stays above the 50-day MA. Set tight stops below, 6,180.

KEY DATA RELEASES

Tuesday, August 9, 2022
– Philippine unemployment rate for June 2022 (6.0% in May2022)
– Philippine exports for June 2022 (consensus estimate: 4.4%, 6.2% in May 2022)
– Philippine imports for June 2022 (consensus estimate: 24%, 31.4% in May2022)
– Philippine second quarter 2022 GDP (consensus estimate: 8.2%, 8.3% in 1Q 2022)
– Corporate Earnings: AC Energy Corp. (ACEN)

Wednesday, August 10, 2022
– US CPI year-on-year for July 2022 (consensus estimate: 8.8%, 9.1% in June 2022)
– Corporate Earnings: Monde Nissin Corp. (MONDE)
– Corporate Earnings: Robinsons Land Corp. (RLC)

Thursday, August 11, 2022
– Corporate Earnings: Emperador Inc. (EMI)
– Corporate Earnings: Megaworld Corp. (MEG)
– Corporate Earnings: Converge Information and Communications Technology Solutions, Inc. (CNVRG)

Friday, August 12, 2022
– Corporate Earnings: Globe Telecom, Inc. (GLO)
– Corporate Earnings: Ayala Corporation (AC)
– Corporate Earnings: Alliance Global Group, Inc. (AGI)
– Corporate Earnings: LT Group, Inc. (LTG)

It’s normal to feel panic when prices are galloping, the markets are in disarray, and your investment portfolio is in dire need of resuscitation.

For Don Carlo P. Hernandez, Metrobank’s Portfolio Strategy and Advisory Division Head, it is best to quell that panic first and make a little effort to understand what’s happening.

How inflation affects portfolios

He said inflation affects your investments in two ways. On a general level, it affects your purchasing power and your minimum goal for investing.

“As inflation goes faster, you will have less purchasing power. And when you talk about investments, at the very minimum, they should beat inflation. Otherwise, your investments will lose value over time. High inflation increases your hurdle rate,” he said.

On a more technical level, which affects the financial markets, inflation is a welcome thing. It indicates economic growth as long as it is managed between the targets set by the Bangko Sentral ng Pilipinas (BSP).

“Inflation is a precursor for growth,” said Hernandez. “If inflation is within the BSP’s target of 2-4%, then financial markets should be neutral about it.”

Higher inflation is signaling the central bank to hike interest rates to give citizens an incentive to save their money instead of spending it. This tempers inflation by reining in demand for non-essential goods and services. For fixed income instruments such as bonds, this means yields will increase over time.

Inflation will also affect equities because the valuation of companies is based on computations that use interest rates to determine how much the company is worth. An unexpected swift rise in interest rates, therefore, affects these computations toward stock price declines.

Finding the right strategy

Risk events, or those unexpected events that affect financial markets, such as Russia’s invasion of Ukraine, are priced in by financial market participants, reflecting risk sentiment towards investment assets.

These events pushing inflation higher are perhaps priced in, according to Hernandez. But uncertainties remain, and there may be room for further increases.

You have the option of choosing between two types of portfolio management: active or passive. With the volatile environment that we have, it is best to be passive, said Hernandez.

Active portfolio management refers to intraday buying and selling, short-term buying and selling, and specific stock selection. Buy low, sell high is the mantra.

“This type of portfolio management is probably not the best one right now. Some academic literature shows that less than 10 percent of active managers actually get it right in highly volatile markets. Only a few people do so,” said Hernandez.

“The recommendation in high volatility markets is to stay passive and just track the index. Don’t do anything fancy, especially if the time dedicated for investment research and market trading is limited,” he added.

Asset allocation

“At the start of the year—of course, this is already hindsight—it would have been better if you stayed in cash. But right now, after the markets have fallen, the recommendation is to go for fixed income, more than equities. Some yields are becoming attractive, especially for those who depend on interest from investments,” said Hernandez.

“To be honest, if you are not comfortable with volatility, then you might as well stay nearer the conservative side of things. Stay with fixed income and money market investments, then fight the battle when you are already comfortable. However, if you are invested already, just be patient,” he said.

One consideration is your time horizon.

If, say, you started with PHP 500,000 and it was whittled down to PHP 300,000, ask yourself, “Do I need this money by next year?”

If the answer is yes, Hernandez said it is best to keep it in cash and put it in a time deposit. If the answer is no, and you have a longer time horizon, say, five years, then you can be more aggressive in holding on to your investments until recovery, and in hunting for undervalued assets.

You could also consider tranche investing or cost averaging, said Hernandez. Divide your funds into tranches, then invest the first tranche when the market falls, the second tranche when it falls again, and so on.

He cautioned, however, that you should be prepared to stomach the volatility given current market conditions.

“If you have a longer time horizon and you want to bet on equities, go ahead. I’m very positive about the long-term returns when you’re invested in equities,” he said.

Final tips and recap

“Many are asking what to do to preserve their wealth. To be honest, just be patient. It is all about patience at this point,” he said.

“If you need cash next year, just stay in more conservative investments. If you are invested, be patient. Don’t buy and sell like crazy. If you’re invested in equities, just watch the index. As long as you can handle the volatility and you have a longer time period to invest, that’s OK,” he said.

One final tip: consult your investment specialist. Everybody can benefit from the experience and perspective of a trusted investment professional.

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir. 

There are various asset classes nowadays, but which of these actually fits your overall profile?

This starter kit can guide you when you talk with your investment specialist. But first things first, what type of investor are you, really?

The Risk Averse

If you want to preserve your principal at all times and can only take the least possible risk, then look no further, because you belong to the risk-averse cohort. Risk-averse investors just park their money for emergency purposes so they can withdraw it anytime. Given the short investment horizon, the potential gain is also capped at a minimal level. Risk-averse investors are typically familiar with and have opened savings accounts. For better yields, time deposits are also a viable option given that they are insured by the Philippine Deposit Insurance Corporation (PDIC) up to a given amount.

The Conservative

If your goal is to preserve your capital but you can deal with a little more risk compared to risk-averse investors while staying in low-risk investments, then you can be considered a conservative investor. This type of investor usually has liquidity requirements and needs a regular payout. While conservative investors usually have time deposit placements, they may also have peso government securities such as Retail Treasury Bonds (RTBs), given that these have higher returns if held until maturity. RTBs are also virtually risk-free assets backed by the National Government.

The Moderate

If you can forego some capital preservation in lieu of capital growth, do not require regular withdrawal, and only save for some future expenditure, then you are a moderate investor. This type of investor withdraws funds only when necessary, and is knowledgeable and experienced in investing in government securities and corporate bonds and notes. Other suitable products that can provide higher returns but with some issuer credit risk are investment-grade foreign-currency bonds or notes, vanilla derivatives such as forwards and swaps for hedging purposes, and asset swaps with underlying investment-grade securities.

The Aggressive or Sophisticated

If you are open to having exposure to high-risk assets and potential capital loss in the short-run, in exchange for higher long-term gains, then you are an aggressive or sophisticated investor. Aggressive investors’ primary goal is to enhance their wealth. Thus, they are willing to wait for years until they reach their desired yields. These investors have prior knowledge and experience in equities, mutual funds, Unit Investment Trust Funds (UITFs), real estate, derivatives, and regulatory capital instruments. Worth a second look are additional investment vehicles with the highest returns and maximum capital growth, but with volatility, credit, market, and regulatory risks such as foreign currency bonds or notes, asset swaps, and Tier 2 capital instruments.

If your profile does not match the asset that you want to invest in, fret not, as there is a thing called a waiver. Ask your investment specialist or relationship manager today for more information.

ANNA DOMINIQUE CUDIA, MBA, CSS, is the Head of Markets Research at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to internal and external clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She has a Master of Business Administration (Finance) degree, with distinction, from the University of London, and a Bachelor of Science in Business Administration degree, cum laude, from the University of the Philippines. She is also a CFA Level I exam passer and a Certified Securities Specialist. She is a naturally curious person and likes to travel here and abroad.