Patriotic investing
Question: I have been hearing about the foreign “hot money” inflows to the Philippines. What is the significance of this to local entrepreneurs and investors? Should an OFW like me grab this moment to invest in stocks as well?—Dennis from KSA
Answer: A quick definition is in order before I answer your question. The term “hot money” refers to flows of capital from one country to another, the main purpose for which is to make profits from differences in interest rate, anticipation of shifts in exchange rates and/or a buoyant stock market. Since hot money can move very quickly, they have the potential of causing instability in the markets they come in and out of.
While a big rush of money coming into the Philippines, for example, can result in higher stock prices, it can also cause significant pressure on the peso to appreciate to the detriment of dollar earners such as the OFWs. If a huge amount of hot money flows out of the country, the reverse can happen—stock prices will drop and the peso will depreciate. These scenarios are very simplistic implications of the effects of hot money. In reality, the impact of hot money flows can be more complex and too detailed for discussion in this article.
So, let’s focus on the other part of your question. Should you grab this moment to invest in the stock market? Let me give you a short background before I answer that question.
With the exception of 2004 and 2008, the Philippines had positive annual net foreign portfolio investments for the past 11 years ending in 2012, when the yearly net foreign portfolio investments were more than $1 billion. For six of the 11 years under review, our annual net foreign portfolio investments were at least $3 billion. We were comparable to our twin country, Thailand, and catching up with the other Asean countries.
The correlation between our net foreign portfolio investments and the PSEi is quite high. This means that when annual net foreign portfolio investments are high, there is a tendency for the PSEi to also become buoyant. The reverse can also be true.
This is not to burst your bubble but you should NOT invest in stocks only because hot money is flowing into the country. If you do, you might end up buying what the foreigners are selling.
Just like in running a business, stock investing also benefits from the first mover advantage. This means you have to do what the world’s greatest investor, Warren Buffet, does. Warren Buffet does not buy stocks. In fact, it is said that the word “stocks” is not in his vocabulary.
Warren Buffet buys companies but he will not buy just any company. He will buy those that profit regardless of what happens to the economy they are in, the direction of net foreign portfolio investments included.
When I train people on entrepreneurship, I tell them that for any company to be successful, it must have four basic departments working effectively and efficiently. These are production, marketing, human resources and finance. Warren Buffet looks at these departments in determining the value of a company. He will ask if the company has some revolutionary production technique that no other company has; if such unique production technique gives it pricing power; if the company’s product is marketed effectively; if the company is run by top notch management and a cooperative labor force, and if the company’s finances are managed optimally. Then, he will compare the value of a company with its market price. If he sees that the market price is lower than the intrinsic value, he is likely to be one of the first few to uncover this diamond in the rough. That’s the only time he will buy a company.
In a nutshell, you should be buying a company for its intrinsic value and not because a lot of people are buying it. Do not be caught up with “grabbing the moment” because that moment will pass. When it comes to investing in companies, have a long-term investment horizon. That will help you weather the ups and downs or volatility in equity investing.
As I said earlier, hot money can be destabilizing to financial markets. That is why there is another reason why you and other OFWs should be investing in this country and it is for patriotism. OFW remittances in 2012 amounted to over $21 billion. Imagine how much additional stability we would have if even just 10 percent of that is invested in the country’s capital markets. That is potentially another $2 billion of permanent investment that could lead to benign interest rates, a stable exchange rate and a buoyant stock market, not to mention a better financial future for the OFWs themselves.
Visit www.personalfinance.ph. There are so much more free resources there for you to benefit from, including Ya!man, a personal finance mobile app. You may also want to join EnRich, our public training on personal finance. Details for EnRich can also be found in the website.
So never mind what the foreigners are doing. It’s high time we Filipinos take the lead in determining our own destiny. After all, it is more fun in the Philippines.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. For inquiries may be sent by SMS to 0917-505-0709 or e-mailed to [email protected]. To learn more about the RFP program, attend a free orientation on March 14, 7pm at the PSE Center. Email [email protected] to register.)
