Benel Lagua l January 5, 2024 l The Manila Times
ANYONE trying to make their resources grow should know the classic lessons in investment. By learning how to invest early, one takes advantage of the power of compounding sooner than later. Be aware of the costs in investing, including transaction costs and all fees, both front-end and exit, related to utilizing mutual funds, UITFs, or any investment channel. Diversify by putting your eggs in baskets that are preferably unrelated or technically not perfectly correlated.
Stick to an investment strategy even when the markets seem to be moving unpredictably. Buy businesses, not stocks. Don’t be alarmed by the day-to-day gyration of prices. And if it’s too good to be true, it probably is. Make sure you achieve returns based on appropriate adjustments made for risks. Always aim to at least beat the inflation rate. Avoid chasing fads and fashions in a rising market.
These are all standard practices of those who consider themselves to be intelligent investors. But for 2024 and beyond, there are new realities that are not necessarily promising. The golden years of investing up to 2021 are behind us. The markets will be offering less. Globalization and long periods of soft inflation are things of the past. Many jurisdictions are now taking the protectionist stance, and the concept of country specialization or economic comparative advantage has taken a backseat. Monetary policy remains paranoid about the need to tame inflation. Performance in the past cannot be a guarantee of future returns.
As The Economist writes, “the long-term outlook for stocks which have historically been the main source of investor’s returns remains dim. …The result is a renewed squeeze on earnings yields, and hence on expected returns. For America’s S&P 500 index of large stocks, this squeeze is painfully tight. The equity risk premium, or the expected reward for investing in risky stocks over “safe” government bonds, has fallen to its lowest level in decades. Without improbably high and sustained earnings growth, the only possible outcomes are a significant crash in prices or years of disappointing returns.”
Despite this, Wall Street closed on a surprisingly strong 2023, even as market watchers initially anticipated a recession. Inflation moderated, corporate earnings were better than expected, and the Fed appears to be backing away from interest rates hikes. The S&P 500 managed a 24 percent gain over 12 months. The consensus, however, is that the risks confronting equities in 2024 remain given high labor costs, high equity valuations and the political (presidential election) scenario.
The Philippine Stock Exchange Inc. index closed at 6,450.04 points on the last trading day of 2023. Year to date, the main index decreased by 1.8 percent. Daily average turnover was at P6.09 billion, down by 16.5 percent from 2022’s P7.40 billion averages. Net foreign selling hit P75 billion. The markets have not been kind to investors in the past year and remain challenging moving forward.
With unpredictable market conditions, there is a need to be more astute, sensible and informed in making investment decisions for the future. The only piece of good news is better access to information for those who will be diligent enough. Digitalization has enabled the creation of online and mobile platforms, which investors can readily access instead of dealing with brokers and traders. The downside is young investors are readily tempted to go in and out quickly as a knee-jerk reaction to sudden price movements.
In a personal finance article, The Economist advises against three traps facing young investors today. First is holding too much cash. The Generation Z (born after 1996) holds on to too much cash, 29 percent, compared with the 19 percent of baby boomers. Motivation includes fear of declining asset prices, mobility and frequent job changes, inertia and forgetfulness. Young investors’ preference for cash leaves them exposed to inflation and the opportunity cost of missing out on returns elsewhere.
The second trap is reluctance to own bonds, the other “safe” asset class after cash. Gen Z portfolio only includes a 5 percent allocation, compared with 20 percent for baby boomers. As I have written in another column, bond investments in the past year have offered better yields based on risk-return tradeoffs. At the very least, they help outpace inflation.
Finally, The Economist describes the proclivity of the young to go “thematic investing.” These capture the latest fads like betting on volatility, looking at AI, and more popularly investing according to environmental, social and governance (ESG) factors. Mutual funds have been used as outlets for these niche investments. And they tend to be more volatile, less liquid and costly.
While investing in ESG funds appears socially responsible, a Harvard Business School study shows that funds investing in ESG charge substantially higher fees while investing 68 percent of assets in exactly the same holding as the non-ESG ones. The question here is whether the returns justify the added costs.
The markets look unappealing. This means investors need to remain vigilant. Despite these challenges, there are still opportunities out there for both asset preservation and growth. It will, however, require hard work, diligence and careful fundamental analysis. And, of course, a little dash of luck. But then, there’s no such thing as a “free lunch” in finance.
*** Benel Dela Paz Lagua was previously EVP and chief development officer at the Development Bank of the Philippines. He is an active Finex member and an advocate of risk-based lending for SMEs. Today, he is the independent director in progressive banks and some NGOs. The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as Finex.