Gus Cosio says so

Ideas on the Philippine Stock Market

Moving to a different plane

Wealthy Filipinos have been bringing some of their wealth home since the global financial crisis erupted in the summer of ’07.  When I was living in Hong Kong, next to the mainland Chinese, much of the private banking business was from the Philippines.  In this decade alone, I had known a lot of international private bankers that had held their permanent offices in hotel rooms at the Shang-ri-la in Makati.  The Philippine business was just so lucrative.

This  was the decade of structured products – equity linked notes, credit linked notes, CDS backed, CDO’s, carry trades, all supposedly of the principal protected sorts.  Many Filipinos even leveraged the equity in their account upon advise of their private bankers that nothing would go wrong.  Many, unforunately, lost money.

What went wrong?

In the good old days (not too long ago), when I was in the international capital markets business, when we hived principal protected structured products to our customers, they were genuinely principal protected. The underlying principal was invested in zero coupon U.S. treasuries or on occasion in German bunds or even French OATs. It was usually the discount or only a portion of the principal was put at any risk, usually in a highly leveraged derivative. If things went wrong, there was always the U.S. treasury zeroes to fall back on for the principal.  We simply unwound the leveraged position – the derivative postion – and sold the government zero.  The investor got all or most of their principal back. It was a lot more prudent then and we dealt with institutional investors, not with private wealth.

The problem arose when people got addicted to these great yield producing ideas.  Many got greedy and bankers inadvertently fueled the greed.  Everyone and his dog became a sophisticated investor.  All of a sudden, the seller of the structure was standing as the credit behind the product.  Whereas in the past, as sellers of structured products, we did not expose our dealer postion to principal risk, the products of this decade put the dealers’ balance sheet behind an even bloated portfolio of derivative linked structured assets.  The unseen deception was the claim that the structured product continued to be principal protected.  This was why Bear Stearns, Lehman Brothers and AIG collapsed.  People compromised the principal protected concept by substituting their own credit in place of the risk free credit of governments.

Last Tuesday, behemoth Swiss bank UBS reported 2009 1st quarter loss of SwFr 1.98 billion (US$1.75 bil). The bank said that it took further write downs and warned that bad debt charges could rise further. The good news, they said, is that this is narower than the SwFr 11.9 billion it lost a year ago when it was hit by US$19 billion of write downs in mortgaged linked securities. Big deal. We to jump with joy. Will they now regain the faith of the wealthy?

On Friday, the U.S. announced the report on the stress test of the country’s 19 largest financial firms and the U.S. government said that 10 of them needed to raise additonal capital in order to withstand any furter turmoil in the financial market.  The problem remains pervasive.

What am I driving at?  Filipinos, as with many of the world’s rich had put too much credibility, faith and money on the capability of these global financial firms to handle their wealth.  As a result, they lost part or most of their fortunes.  Consequently, these bankers just threw up their hands in surrender to the fiasco that they created.  Many even dropped out of sight, avoiding to confront their clients for the loss.  It was the clients that took it in the chin.  Hopefully,  people are more prudent today.

In my view, the investor of today must remember to KISS – Keep It Simple, Stupid.  Any market practitioner who is worth his bones will tell you that investment returns will always be subject to mean returns. When the private bankers started to sell clients the high yield derivative linked and principal exposed products, they lost sight of the investment axiom that reward is a result of the amount of risk you take.  You don’t expect to bet on the same thing over and over again and believe that the market will not take some of the returns back.  That’s the reason for the pricniple of diversification or of the risk of over valuation in this case.

I’m touching on this subject because I think one reason why our local stock market is starting to fly is because of what technical analysts term as the weight of money.  A good portion of the off-shore wealth of Filipinos is coming home.  That’s a lot of money that has lost faith in the credibility of these foreign giants. (Ogres might be the more appropriate term.)

In times of trouble, what would prudent people do?  They stay home.  They stick to what is familiar and avoid what is unkown and remotely familiar.  Filipinos understand Ayalas, SMs, PLDTs, Metrobanks, Lopezes,Gokongweis, Aboitizes and the like better than CDOs,CDSs, MBSs,CLNs,ELNs and those new fangled financially engineered stuff.  Furthermore, these companies are doing much better than the UBS’s and the financial giants of this world.    

There’s a lot of money that’s continuing its search of a home.  A lot of money that’s coming home to the Philippines.  When cash is looking for assets, the price of assets are bound to rise.  The stock market is a lot more liquid that property or real estate.  Real estate investment has a huge carrying cost and has no liquidity. Unless you can derive good rental income, returns are unexciting.  Stocks, on the other hand, are presenting bargain basement values.  The risk reward ratio looks compelling from where we stand.

Warren Buffet says that you must buy stocks the way a housewife goes shopping – spotting the bargains and buying them.  Are there still enough bargains in this market?  You’d better believe it.  Remember, the trend is still your friend.  The flight to spectacular returns hasn’t taken off yet.  A prudent investor would not miss the plane.

Have a good week ahead!


May 10, 2009 - Posted by | Financial markets in Asia


  1. Great insights!

    Comment by Jim paredes | May 11, 2009 | Reply

    • Thanks, Jim. I hope you find it useful.

      Comment by Gus Cosio | May 11, 2009 | Reply

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