Month: December 2022
Portfolio Management: Balancing short-term and long-term through laddering
Short-term and long-term investments have their advantages and limitations. How do you get the best of both worlds?
By Daniel Andrew Tan
Is it really possible to get long-term rates with short-term investments?
Let’s find out. When considering the tenor (length of time to maturity) for a potential investment, we often ask ourselves two things: “How long before I might need the money?”, and “How much more do I gain from investing long-term versus short-term?”
The first question is rather straightforward, but is often followed by “what-ifs”. What if a good opportunity comes up? What if I’m faced with an emergency? These concerns (all very valid) tend to push us toward the shorter tenor placements. Why? Any time there is uncertainty, we want to remain liquid, hence the old adage, “Cash is king”.
The second question usually gets us to consider longer-tenor investments. That’s because under normal circumstances, long-term investments will outperform short-term placements. The higher interest rates are meant to compensate for the added risks of locking in longer.
So, how do we get long-term rates while keeping our portfolio relatively liquid?
The right strategy
We can do that through an investment strategy called “laddering”, where maturities are staggered across different periods in the future. For example, instead of investing in a single 5-year security, we can instead invest in three different securities maturing in 4, 5, and 6 years from now.
This gives us almost equivalent interest rates while also adding liquidity and flexibility to our portfolio. In three years’ time, we will effectively have annual investment maturities that are giving 5-year rates.
Do this frequently enough, and our portfolio should look like this:
“Laddering” can be used to schedule the maturities of your investments over time, balancing returns with flexibility and liquidity.
It looks plain enough, but assume we booked all of the investments 4 years prior. Then the year 1 maturity should be giving 5-year rates, year 2 gives 6-year rates and so on. Furthermore, the portfolio has maturities each year, giving the option of reinvesting (ideally in the long end to keep yields high) or utilizing the funds elsewhere as needed. These are the main advantages of adopting this strategy.
Trade-offs
It all looks good, but laddering also has some trade-offs. It requires a higher overall investment capital than you would otherwise need, since each placement will need to clear minimum investment requirements depending on the type of security. This makes it either difficult to implement in full, or entails a gradual build-up over time.
Secondly, laddering also requires sufficient planning before it can be properly implemented. It involves timing placements according to one’s needs as well as the interest rate environment at the time of placement. While it offers significant yield benefits, it requires a more active approach than some may prefer.
Bottomline: Laddering is definitely a viable approach to enhancing your fixed income portfolio. Should you choose to implement it, the best time to start would be when rates are already high.
Plan out your maturities according to projected funding requirements first, then just spread out your placements to maintain flexibility and enhance yields. As a general guideline, keep maturities short in a rising rate environment, and tranche in longer as rates peak and start to fall.
(If you are a Metrobank client, you may reach out to your relationship manager or investment specialist to know more.)
DANIEL ANDREW TAN is a Relationship Manager for Metrobank’s Private Wealth Division, whose function mainly involves providing investment and wealth management advice to the Ultra-High-Net-Worth Individuals (UHNWI). He brings with him over fifteen years of experience in both retail banking and financial markets, and he avidly monitors Philippine equities. He applies both active and passive investment strategies to his personal portfolio and strongly advocates for a “tailored” approach to investments.
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How does Europe’s winter affect our inflation story?
Europe has stored enough gas to survive the winter, which has, for now, tapered the volatility in global energy commodities markets. Nonetheless, a rebound to high prices is highly likely and the global energy crunch is here to stay for a while.
By Ina Calabio
In our previous article, we talked about Europe’s dependence on Russian energy and its energy crunch as it approached winter amid the Russia-Ukraine conflict.
Since then, Europe has shifted away from Russian gas, turned to other sources of liquified natural gas or LNG, coal, and oil as well as tapped into other markets to secure its energy needs for the winter.
This triggered volatility in the energy commodities market, leaving other economies dependent on these energy sources such as the Philippines paying for higher-than-ever prices.
European and US natural gas prices are declining as Europe achieves its target gas storage. The Indonesian coal price is on a slight decline for November on account of Europe’s met demand for gas.
European countries have already met or even exceeded their gas storage targets (80%) ahead of the winter. As of November 17, the EU has already filled 95.3% of its storage sites with gas (according to Reuters) and continuously does so to reach higher levels.
Given this and favorable weather forecasts of a mild winter, the EU will survive winter and natural gas prices will soften for now. Coal prices are also on a slight downtrend given Europe’s met demand for gas.
Problem solved for this winter. Now what?
While the EU has reached its target supply of oil and gas, the long-term problem remains – there is a limited supply of fossil fuels for energy, especially with the Russia-Ukraine war still ongoing.
Aiming to cut dependency on Russian energy, the EU is set to ramp up its LNG imports in 2023 and its demand is projected to boom. This, however, would be at the expense of LNG shipments to emerging markets. According to Bloomberg, major exporters of LNG (Qatar and the US) are already entertaining bids from European importers with which emerging economies such as Pakistan, Bangladesh, and Thailand have to compete with.
Repercussions in the Philippines
This puts the Philippines in a critical position since it is set to enter the LNG market in 2023. Plus, it would get more complicated once China’s demand picks up as it has been a top importer of LNG.
The same story goes for diesel as inventories go on record lows, and exporting countries shift shipments to countries that can pay big premiums that poorer countries can’t afford.
Economists and market analysts foresee a more difficult energy crunch globally in the next two years. This means elevated energy prices will remain, supply will remain tight while demand will continue growing.
For the Philippines, two LNG terminals are set to operate by the 2nd quarter of 2023. While the global LNG market is seen to tighten, this development provides the country options other than coal in its energy imports. Moreover, the share of renewables in the country’s power mix is seen to grow, especially solar and wind, in line with the country’s goal to transition to a cleaner energy mix.
With elevated energy prices expected to linger, diversification in the country’s power sources is needed as we brace for the impacts of a tougher global energy crunch.
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.
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Peso GS: What’s our game plan?
Just like the frenzy caused by the FIFA World Cup in Qatar, there’s excitement brewing over the recent trading gains of bond investors. New opportunities have sprung, and, with the flattening yield curve, it is a good time to take a look at them.
By Metrobank Government Securities Trading Desk
This article is exclusive to Metrobank preferred clients.
Log in your Wealth Manager account to get access to investment insights, bank views, and webinar videos.
Football fans all over the world have been going crazy over the latest World Cup games, while bullish bond investors are on a similar high over their recent trading gains.
In the past few weeks, better buying interest ensued in the peso government securities (GS) market as it tracked moves lower in US Treasury yields, with the US Federal Reserve recently signaling a downshift in their hiking cycle as early as this month.
The strength of the recent auction for the 20-year Fixed Rate Treasury Note (FXTN) 20-14 has also added to the already growing appetite for risk among players in the peso GS space. Buying interest spilled over to other medium- to long-term bonds, which led the local yield curve to flatten significantly month-on-month.
A flat yield curve means short and long-term bonds offer equivalent yields, so the investor does not gain any excess compensation for the risks associated with holding longer-term bonds.
Entry Levels
The consensus estimate for inflation in November is 7.8%, which is just a sliver higher than the inflation in October. For that reason, sideways trading with a downward bias will dominate the stock market this week. WHAT HAPPENED LAST WEEK The Philippine Stock Exchange index (PSEi) ended 1.78% lower week-on-week to 6,489.65 (-117.29 points). The local bourse sustained its upward momentum early in the week despite the escalating protests in China. The market also inched higher due to the MSCI rebalancing-related trades last Tuesday, followed by the US Fed’s signal of slower rate hikes. On Friday, the index broke its six-day rally as investors booked profits from earlier gains. Top index performers were International Container Terminal Services Inc. (ICT) (+4.9%), Semirara Mining and Power Corporation (SCC) (+4.8%), and Alliance Global Group Inc. (AGI) (+3.7%), while index laggards were Jollibee Foods Corporation (JFC) (-6.7%), Wilcon Depot Inc. (WLCON) (-5.8%), and Monde Nissin (MONDE) (-5.6%). The index breadth was negative with 11 gainers versus 19 losers. The average daily turnover value was PHP 10.8 billion. Foreigners were net sellers of PHP 2.4 billion. WHAT TO EXPECT THIS WEEK The market is expected to trade sideways with a downward bias as investors await local key data releases, including the November 2022 inflation rate, which consensus expects to be at 7.8%, while the Bangko Sentral ng Pilipinas (BSP) expects it to be around 7.4% to 8.2%. Fuel price rollbacks are also anticipated next week, as gasoline prices are expected to fall by PHP 1.80 to PHP 1.90 per liter, diesel prices by PHP 1.90 to PHP 2.00 per liter, and kerosene prices to decline by PHP 1.60 per liter. STOCK PICKS FOR THE WEEK Ayala Corp. (AC) — BUY ON BREAKOUT The stock is now trading above its key moving average (MA) prices (50-day and 100-day) and is on its way to retesting the 200-day MA. The technical indicator MACD confirms the bullish momentum. Accumulating once AC breaks above the 200-day MA (~PHP 705.00) is advisable. Set stop limit orders below PHP 685.00 and take profits at around PHP 800.00/PHP 840.00. AbaCore Capital Holdings, Inc. (ABA) — LIGHTEN POSITIONS Looking at ABA’s recent price action, the recent drop in price resulted in price breaking below both the 50-day and 100-day MAs. The uptrend now is now clearly broken and those still holding should consider lightening their positions. As for the company’s recent ventures, last November 24, 2022, ABA’s subsidiary, Philippine Regional Investment Development Corp. (PRIDE), entered into a memorandum of agreement (MOA) with Highsource Prime Building Inc. to undertake various projects at ABA’s Montemaria Shrine, a tourist destination in Batangas. Under the partnership, both companies agreed to organize a joint venture corporation to develop a four-star hotel, a land and water amusement park, residential and commercial community, as well as a “3D Glass Paradise.” Lightening positions at current levels is advisable. The next support levels are at PHP 2.00 and the 200-day MA (~PHP 1.68). Security Bank Corp. (SECB) — BUY ON PULLBACKS Given the recent pullback, investors and bargain hunters can set buying levels around PHP 92.00. After which, set stop limit orders at PHP 88.00 and set profit levels at around PHP 110.00/PHP 118.00. PSEI TECHNICAL ANALYSIS Resistance: 6,600 Support: 6,400 The PSEi has finally pulled back after trading at overbought levels for the first time since August 2022. The market must stay above 6,400 and break above 6,600 in the next trading sessions for the short-term uptrend to remain intact. The MACD continues to exhibit bullish momentum, with the MACD line hovering above the signal and zero lines. TRADING PLAN Look to accumulate at current levels. Set stop limit orders below 6,300. KEY DATA RELEASES Tuesday, December 6, 2022 Wednesday, December 7, 2022 With the changing scenario in the yield curve, where long-term rates are decreasing more quickly than short-term rates, it may be time for you to tweak your fixed income portfolio. Log in your Wealth Manager account to get access to investment insights, bank views, and webinar videos.
The recent rally in peso government securities (GS) showed us that end-clients are still flush with liquidity. The yield curve bull-flattened, a scenario in which long-term rates are decreasing more quickly than short-term rates, as demand poured into the recent 20-year issuance, which coincided with the rally in US Treasuries. With the upcoming PHP 300-billion maturity in mind, on top of year-end demand, we believe that the peso GS market still has room for another rally. With this window of opportunity, we suggest taking profit on 10-year bonds that were bought in light of the desk’s previous trade plan, reinstating positions in Fixed Rate Treasury Note (FXTN) 20-14, as well as 12- to 20-year bonds, which provide better relative value. Entry Levels Waning COVID-19 cases and relaxed travel restrictions have prodded people to take long-postponed trips. It’s good for the economy, but will this last? Before the pandemic, tourism had been a prominent part of the Philippines’ economic landscape. Its contribution to the country’s gross domestic product (GDP) had been increasing from 2009 to 2019 based on data from the Philippine Statistics Authority (PSA). From a 12.9% share of GDP in 2019, it drastically went down to 5.1% and 5.2% in 2020 and 2021, respectively. What role exactly does tourism play in economic growth? First, tourism helps with exports. Inbound tourism expenditure, that is, the expenditure of non-resident visitors (either foreigners or Filipinos permanently living in other countries), makes up a portion of exports, which boost the country’s GDP. Inbound tourism expenditures in the Philippines by non-resident visitors contributed a significant 10.8% to exports in 2019. However, because of the pandemic and stringent international travel protocols, it plunged to only 2.9% in 2020 and a measly 0.6% in 2021. Second, domestic tourism expenditure, or tourism-related expenditures of a resident visitor (i.e., a Filipino citizen) within the Philippines, forms a part of consumption, which is also a driving component of GDP. The contribution of tourism expenditures to consumption by Filipino residents visiting other parts of the country peaked in 2019 but substantially dropped in 2020 owing to strict local mobility curbs. However, it improved marginally in 2021 as local travel restrictions relatively eased. In 2022, efforts to improve the tourism industry were undertaken by the government to help in the country’s recovery. The Philippines started to allow nationals from visa-free countries to enter, and borders have been opened to all nationals to ramp up inbound tourism. Additionally, unvaccinated foreigners are now allowed to enter, needing only a negative antigen test. The peso’s weakness likewise plays to the advantage of the tourism sector, as goods and services in the Philippines are valued cheaper, which may encourage foreign nationals to travel here. More LGUs also relaxed their travel restrictions for resident visitors, a plus for domestic tourism. Add to that the ongoing talks between the Department of Tourism (DoT) and the Department of Interior and Local Government (DILG) to lift individual restrictions implemented by different LGUs and have a uniform national policy. This could further bolster consumer spending, which accounts for three-fourths of GDP. There is no doubt that the economic reopening and the subsequent easing of mobility curbs have been effective. From 1.48 million tourist visitor arrivals in 2020 to a low of around 164,000 in 2021, the government targeted tourist arrivals at 1.7 million for this year. Surprisingly, from February 3 to November 13, the Philippines already logged 2.03 million tourists, according to the DoT, exceeding targets. This would most likely translate to improved inbound tourism expenditures and, hopefully, exports. This, however, is still far from the 6.76 million pre-pandemic tourist visitor arrivals from February to November 2019. To add to this, this year’s Philippine Travel Exchange (PHITEX), the largest government-led travel trade event, produced a record-breaking PHP 172 million in business sales in just two days. This is a major annual marketing event scheduled last October that encourages Philippine sellers to endorse competitive Philippine tourism packages and tourist destinations to tourism stakeholders and qualified buyers. The robust and higher-than-expected sales only go to show that people are willing to spend and are very eager, as of now, to travel. Sure, easing COVID-19 infections and relaxed travel protocols have indeed spurred revenge travel, as people have not been able to travel for more than 2 years. But how long can this be sustained? With the current economic climate here and globally, we must be wary of the possible risks to tourism and its recovery, especially the high-inflation environment and the likelihood of a global recession. These could tone down travel in general. For now, let’s hope that the people’s eagerness to travel will sustain the momentum of revenge travel and the tourism sector. 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.
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Stock Market Weekly: Sideways trading as investors await inflation data
By First Metro Securities Research
– Philippine Consumer Price Index (CPI) year-on-year for November 2022 (consensus estimate is 7.8%, while the actual for October 2022 is 7.7%)
– Philippine unemployment rate for October 2022 (actual for September 2022 is 5.0%)Read More Articles About:
What’s next for the peso GS market?
By Metrobank Government Securities Trading Desk
This article is exclusive to Metrobank preferred clients.
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Tourism and revenge travel: catalysts for growth
By Anna Isabelle “Bea” Lejano
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