Smart money decisions

Minimizing risks is key for all individuals who want to grow their money. For retirees particularly, fixed income investments, specifically time deposits, money market placements, bonds and retail Treasury bonds are the safest and most conservative way to go at this point with inflation once again threatening to go up as the El Niño starts to grip the country, geopolitical risks continue to percolate and global political uncertainties cause jitters in global financial markets.

The brave and the bold always dare investors with the mantra “the bigger the risks, the higher the returns,” and thus, social media is awash with get-rich-quick advice on cryptocurrencies and stock market plays. Unfortunately, while most point out the high returns, very few warn or advise about learning the fundamental skills to investing and the attendant risk of not fully knowing what key economic indicators to watch out for.

Monitoring inflation

It is important to understand inflation to forecast the trend where investors should invest their money.

The Philippine February 2024 consumer price index rose 3.4 percent year on year versus the estimated three percent.  This should signal a cautionary stance for Filipino investors in handling their savings and investing their money in banks,  business or real estate.

The government has tamed inflation through prudent fiscal and monetary policies so much so that by November 2023, inflation was at 4.1 percent, coming from a 14-year high in January last year of 8.7 percent.  By December, inflation was further down to 3.9 percent, and finally by January this year had dropped to 2.8 percent.

The realization of a declining inflation, however,  should be taken with caution.

In the 2024 World Economic Forum report, its chief economist’s outlook stated that “the mood remains cautious,” and that  rate hikes may have been paused. It cautioned that it does not mean that a reversion to low rates is imminent, instead warning that “Central bankers have emphasized the need to respond to structural challenges for the global economy, like the climate crisis, demographic shifts and deepening geopolitical fractures.”

Bangko Sentral ng Pilipinas Governor Eli Remolona was recently quoted in a March 6 press conference as saying “it is too soon to declare victory in the fight against inflation, signaling a higher for longer rate environment, as inflationary risks continue to cloud the outlook.”

Furthermore he said, “We seem to be on our way, but there’s not enough data to assure us that we will settle comfortably within our target range of between two and four percent.”

The Philippine stock market

With the development of technology to facilitate investing in the stock market, the trend is to promote online trading. However, a closer look at the trend in the stock market must be considered and studied.

During the administration of former president Benigno “Noynoy”Aquino III, the equities market became a popular choice for Filipino investors.

At the start of the Aquino administration in 2010, the Philippine Stock Exchange index was at  the 4,000 level.  At the time, inflation was at 3.7 percent. By March 1, 2012, the PSE index rose to the 5,000 level. Inflation had been brought down to 3.03 percent.  By Jan. 7, 2013, the market reached the 6,000 level, and by April 22, 2013 it pierced the 7,000 level. Inflation, at the same time, had been brought  down further to 2.58 percent.

By the end of the Aquino administration, the PSE index reached the 8,000 level, with inflation down to 1.25 percent.   This spectacular equities market trend continued through the early years of former president Rodrigo Duterte’s administration, reaching a PSE index all-time high of 9,078 in January 2018.

So spectacular was the growth of the Philippine stock market, that the bandwagon effect on investment in stocks in the PSE was encouraged, but without much of the market players really understanding the fundamentals involved.

At present, however, the PSE index has succumbed to geopolitical risks, the recent financial turn of events, the pandemic and the wars in the Ukraine and the Middle East. It has, for the past one and a half years, hovered within a band of 6,200 to the 6,900 index level. That translates to about an 11 percent spread to earn profits.

Taking away brokers’ fees, that is just about an eight percent profit window.

To earn that eight percent profit, a stock market investor must be able to choose the right stocks and get the timing right on when to buy and when to unload. That’s the tricky part if one is just a passive investor and who has to deal with a brokerage house.

A factor that is absent from the arena of the PSE now compared to what it was in the past administrations is foreign money, specifically “hot money.”

The pull out of foreign investments in the later part of the Duterte administration stunted interest in stock market prospects.

Certainly the dearth of new IPOs is an indication, even the delay and the pull out of IPO listings is a telling indicator. To add to this, the pull out or flight of “hot”money or foreign funds from the PSE, reported at an estimated $531 million in February alone, is a glaring indicator for caution.

Fixed income investments

More often than not, investments in fixed income instruments are discouraged due to the seemingly low returns that one gets, especially with the mostly single-digit rate of return on such investments. Instead, those eager to see fools part with their money, offer promises of double digit returns on schemes that eventually turn out to be scams or fraudulent schemes.

Fixed income investments in Philippine banks certainly had minimal demand from Filipino investors, owing to very low interest rates. From the period 2014 to 2017, Philippine banks paid out less than two percent interest per annum on fixed income investments. Quietly, however, local  fixed income investment programs have developed significantly to provide Filipinos consumer investment products that can actually provide a viable income stream.

By 2019, Philippine time deposit interest rates were up at 4.08 percent. At present, time deposit rates of up to 5.5 percent are available, and with inflation at 3.4 percent,  Filipino investors  can be said to be earning money from their money.

Last Feb. 13, The Star reported that “investors demanded higher rates ahead of the BSP policy meeting on Thursday ( Feb. 15), adding that “The BSP is expected to move in lockstep with the US Federal Reserve and keep rates unchanged for the third straight meeting.”

It certainly seems to be the trend. The latest Bureau of the Treasury data show that the 91-day paper increased rates by 4.5 basis points to 5.506 percent from the previous and secondary rate of 5.461 percent.  Likewise, the 182-day Treasury bills increased 6.9 basis points from the last auction rate of 5.861 percent. Demand for T- bills was expectedly very high.

The Bureau of Treasury fully awarded an upsized volume of securities from a P15 billion target to P17 billion. The Treasury also upsized the one year tenor from the P5 billion target to P7 billion, with the auction 3.3 times oversubscribed, attracting P49.3 billion in total tenders, prompting the committee to double the accepted non-competitive bids for the 364-day security.

All indicators point to, in the short term, to fixed income investments as being stable and providing reasonable return with lower risks to the Filipino consumer. As I pointed out earlier, with a lower inflation of 3.4 percent, conservative investors actually have the opportunity to earn money on such investment.

For conservative investors, caution with the expectation of  a high level of uncertainty in the economic environment should rule most investment and business decisions in the short term.