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Gus ThumbnailGus Cosio Says So – January 8, 2014

Philippine stocks were firmer today amid net foreign selling of Php 229 million. This has happened for a few instances over the last couple of weeks. In practically all occasions of net foreign selling in the past, the PSEi declined. That is no longer the case, and I hope this phenomenon continues. The question is whether or not this is possible on a sustained basis. In my opinion, I think so.

In previous periods, local exposure to stocks was very shallow both for individuals and institutions. Even the investment departments of banks had very small weighting on equities. I had the experience of seeing a retirement plan proposal which suggested a mere 10 percent allocation to stocks. I thought that it was preposterous. A retirement fund will normally have a time horizon of 25 years. Anyone who follows stocks would know that over a 25 year period, stocks definitely outperform bonds by a multiple of two.

The reason for this ultra conservatism is understandable because up to 5 years ago, interest rates in this country were usually pretty high. At the same time, the selection of stocks to choose from was very narrow.

Nowadays, interest rates have hovered in the low single digit. While they are above their historic lows, when market professionals are asked for their interest forecasts, they merely see a 100 basis point rise. In the meantime, the number of good stocks to choose from have also widened. In short, both supply of stocks to choose from and the investment pool from both individuals and institutions have grown. The result is a domestic equities market that has become deeper and wider. It is starting to be a case of locals starting to become an equal force to foreign investors. It would no longer be a dependable barometer to look at net foreign buying as a bellwether.

I am jubilant tat this is happening thanks to the growth of mutual funds and UITFs invested in equities. My hope is that the inflow into these equity laced funds would continue to grow. I would also assume that retirement fund managers are starting to realize that a heavily bond weighted pension fund will not be good enough to meet future payouts.

We should look forward to our local investors to dominating the stock market. In fact, we should be celebrating that our market is moving in that direction. It is a good reason to be cautiously optimistic in the Philippine equities market for 2014

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