An opportunity for long-term investors
The stock market has not performed well during the past few years. Note that the benchmark PSEi is still around 20 percent below its peak of 8,400, which it hit almost five years ago.
Many analysts (including myself) remain cautious because of heightened inflation risk, elevated interest rates, escalating geopolitical tensions, and possible contagion if the United States suffers from a recession and a bear market. Because of this, it is not surprising that most Filipinos, including those who used to invest actively, are avoiding the stock market.
However, despite the dismal short-term outlook, I admit that the prevailing weakness of the Philippine stock market is an opportunity for some.
These are Pinoys who have excess cash and can afford to hold on to stocks for the long-term, including young individuals who are just starting their investment journey and have several years before retirement, parents who are investing the money of their children, and high net worth individuals who have excess funds that they are sure they won’t need.
During times like this, cash is king, and those who have cash should take advantage of the prevailing opportunity to make a lot of money.
Here are the reasons why I think the prevailing weakness of the stock market is an opportunity:
Economic problems are only temporary. While the economic challenges facing the Philippines and the United States are worrisome, these are normal and temporary. All economic booms are followed by recessions, and it is normal for central banks to respond to high inflation by raising interest rates.
On the positive side, recessions are always followed by booms, and central banks cut rates the moment inflation gets under control. Booms also usually last longer than recessions. Investors who take advantage of depressed prices when times are tough are the ones who benefit when prices recover as economic problems are resolved.
Most PH listed companies have strong balance sheets. Presently, all the listed companies covered by COL Financial are liquid and have manageable levels of debts as measured by the ratios of current assets to current liabilities, debt to equity, and operating cash flow to interest expense.
Banks are also very strong as measured by their capital adequacy ratios, nonperforming loan ratios, and loan loss reserves to bad loans. This should give investors confidence that listed companies will survive the ongoing economic challenges facing the country.
Rising profits. Many companies’ profits in 2024 will already exceed their prepandemic peak. This is despite the ongoing economic challenges and the difficulties brought about by the pandemic. After all, the Philippines is projected to be one of the fastest growing economies in the region with gross domestic product growth forecast to reach 5.8 percent this year. Favorable demographics, the resilience of overseas Filipino workers remittances and the BPO sector will also support profit growth.
Valuations are unreasonably cheap. Despite improving profitability, many companies are trading significantly below their historical average P/E ratios. In fact, some companies are trading at ridiculously low single digit P/Es. There are also many companies trading below their book value (the value of their assets less liabilities). Because of this, many listed companies have share buyback programs.
For those who would like to take advantage of the market’s ongoing weakness to buy very cheap stocks, here are some reminders to help you invest successfully:
Don’t buy too much. Although I am confident that the stock market will eventually recover, I don’t know when this will happen. As they say, the market can stay irrational for a very long time. Because of this, it’s important to buy only enough stocks that you are confident you can afford to keep.
Buying slowly is an option. In case you want to buy stocks but still don’t have funds set aside for it, you can allocate a certain portion of your salary every month for stock investments. Hopefully, this practice will help you create a permanent habit of investing regularly, which is crucial in building wealth.
Stick to dividend paying stocks. Although most stocks are trading at cheap valuations, stick to those that pay cash dividends. Aside from paying you to wait for market to go up, the dividend payments make these stocks like time deposits or bonds, but with an added bonus of capital appreciation in the future.
