Government guaranteed payouts might limit an investment’s full potential
At the time of writing, a ten-year Philippine government bond that can be bought in any of the domestic banks now yields 7.2%. This yield has never been reached in the past seven years and then some.
As a result, a one million peso investment would almost have doubled to two million on its 10th year, guaranteed.
That will be outstanding, especially that an investor a year ago who has invested with the same amount would have nearly half million pesos less after the bond’s tenure all because of a lower yield at that time.
Also, there are probably few publicly-listed Philippine companies that can offer a 7% or more dividend yield like that of Shell Pilipinas and GMA News as of this time.
Sure, government bonds are more secure unless for those real pessimists and chronic government dissenters that would rather assume that the Philippine government will be insolvent ten years from now.
Further, the Department of Finance, doing its job, disputes the so-called ‘debt trap’ and has recently projected that the country’s debt-to-GDP ratio would fall from 42% in 2017 to 38% in 2022.
To be clear, the Philippines’ debt burden has grown 10% to 7 trillion during January to July of this year compared to the same period last year, while GDP growth for this year has been estimated to be at about 6.8%.
This means that the country will certainly experience a higher debt-to-GDP by year-end.
Nonetheless, the 40-50% debt-GDP figure for a country that could deliver this high-single digit GDP growth should not worry investors. Fellow fast-growing economies also share and have even higher figures. For example, Vietnam at 61.5% debt-GDP and Malaysia at 50.9% as of 2017.
This may sum it up as what could be an easy decision for a risk-averse investor–to invest in a guaranteed bond and reap the returns over a longer period of time rather than investing in the Philippine stock market, which has rather hopelessly bounced from the bear market level of 7,232.8 (20% off the 9,041.20 high), in recent months.
At the time of this writing, the PSEi is at 7,276.82. The Philippine stock market index has experienced a 16.6% decline since the start of this year.
For those who would rather not wait and play easily through investing in the bond market, these higher risk-tolerant investors should still consider investing in stocks, or better yet, continue a cost averaging plan so as to accumulate ownership in high-quality companies that can be seen to outlast its peers.
At the time of this writing, only BDO and BPI trade at some premium to their book value among the banks. Meaning, investors can have ownership in most of the publicly listed banks while buying its shares at a discount to its book value (cheap) or at par.
Should these banks continually grow their earnings and book value in the future accompanied by renewed foreign fund influx, positive investment flows should return from the woodworks and appreciate the performance of the financial sector it delivers.
Meanwhile, the same story holds for the publicly traded conglomerates and for most publicly-listed stocks. Most of which are down this year.
For OFWs with their strong dollars, it is important to know that the Philippine peso has not seen these levels since 2005. By the way, the Philippine stock index was somewhere between 2,000 and 2,100 back in that time period as well.
There is no problem converting our hard-earned money from few $s to more ₱s, but the problem lies in the currency exchange rate changes.
For example, an OFW who had bought 1 million peso ($19,990 at $1:₱50.02 on January 1st) worth of bonds at the start of this year would have already incurred a paper loss of $1,476.30, since a one million peso at the time of writing is worth just $18,514.50 ($1:₱54.01 on Sept 30th).
Year-to-date, this 7.34% paper loss in the bond investment value completely placed the entire bond investment underwater since the bond investment has a 5.1% annual bond yield.
Unless the OFW bond investor is willing to hold this bond investment in the next nine years and three months or until the bond’s maturity, investing in the bond market may yield a little less than expected and may still provide less sense of safety and security for the prospector.
Make no mistake, the original investment will still yield ₱560,000* by the time of its maturity but currency exchange and the inflation rate must be contained or at least play along for the investment to bear fruit.
Disclosure: Invested in Philippine stocks, not in bonds.
*Earlier blog stated the original investment will double. This is incorrect, a one million peso investment will grow to about 1.56 million pesos at 5.1% yield on its 10th year.