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8:26 am  Thursday  29 March 2012

For most investors that allocated part or all of their portfolio in equities or equity funds, the first quarter of 2012 has been very lucrative.  I have been advocating since 2009 that people have some of their idle funds allocated to the equity market either by directly choosing some stocks they like and trading on-line or investing in a mutual fund – a pure equity fund or a balanced fund.  Last year – 2011 – was not so profitable for equities as it was for long term bonds, nevertheless SALEF returned 8.18% for the year while SALBAF returned 6.23%.  These returns are moderately superior to traditional money market placements or bank deposits.  While there is timing risk or volatility of net asset values, such risks are mitigated by the active management by portfolio managers who are among the best in the field.

In the short run, I believe we could see more consolidation going on in the global equities markets, and our own PSEi will be surely influenced.  Note that for the first quarter of 2012, the large cap stocks or what we call blue chips have been leading the market to these record highs.   Rightly so, and this is due to the desire of large portfolios to simply gain exposure to the Philippine market.  I believe that after this consolidation that we are seeing, fund managers will return to the large caps as they align their values with the rest of the market.

What does this consolidation imply?

First of all, in a bullish market, professional investors do not want to be under-invested.  The logic is that cash does not earn anything, and even if you keep it in a call deposit account, the yield would only be 1.75% per annum – a return that you can easily ignore.  The possibility that other investors are looking for cheap stocks to get into raises the possibility of good value but ignored stocks to attract attention.  If these stocks really present sound earnings potential, a number of like minded investors would be able to put a good amount of money in them.

Similarly, there would be stocks which the large portfolios would be selling down because they simply would like to lower allocation to a sector or even just the particular stock.  The important thing about a stock that looks badly battered is first to find out if the fundamentals remain the same before buying it.  A lot of unseasoned stock traders buy stocks that have fallen in price only to see it fall even more simply because the fundamentals have gone sour.

Anyway, on a broad market basis, I think Philippine stocks are still in good shape.

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