Definitely not doomsday

Coming from an investor conference earlier last week, it was notable that both investors and firms alike were cautious about the future. While there were no expectations going into the event, relative to past conferences, the experience felt muted. One industry fellow remarked that this was the sign of the times, characterized by low market turnover and unexciting share prices — except for a few stocks.

A key concern is growth. Finance Secretary Ralph Rector reportedly flagged a slowdown in the third quarter, possibly extending to 2026. Meanwhile, Secretary Arsenio Balisacan of the Department of Economy, Planning and Development opined that we could still achieve the lower bound of the forecast range of 5.5 to 6.5 percent for GDP growth.

Perhaps, the most telling indicator is the surprise cut of the Bangko Sentral ng Pilipinas (BSP) this month to 4.75 percent. In their statement, growth was a concern due to governance issues related to public infrastructure spending.

While the mood both at the conference and outside could be labeled as dreary, the reality is that this is not a doomsday scenario. While it is true we are hard pressed to find two or three bagger stocks nowadays (i.e. more than double the price), it does not mean shareholder value is not being generated. It is just a matter of finding value in the market, or more specifically, finding value being returned to the shareholders.

Investors should realize that companies are still generating profits. A far more terrifying period in stock market history was just after the Asian financial crisis in 1997-1998. Several companies were losing money and were fighting foreclosure by the banks on their collateralized assets.

Having cash and zero debt were badges of quality and safety. It was likely that foreign ownership of stocks during this period was drier than they are today. The market was expensive on a price-to-earnings multiple, but not because prices were high, but because earnings were so low.

This is not true today. We have low prices and a good level of earnings. Most companies listed on the PSE are earning and growing profits and while some balance sheets may be stretched after significant capital expansion over the past 10 years, they are within manageable levels.

One interesting conversation during the meeting was on the matter of dividends versus buybacks. Given the amount of profits accumulated over the years, companies can choose to pay these profits out as dividends or use the profits to buy back shares from investors at current prices — ensuring there is a buyer even in a weak market.

My preference is via the return of profits to shareholders via cash dividends, primarily because it fosters a good shareholder relationship with minority investors and, secondarily, it does not affect the liquidity of the stock. Liquidity or the lack of it is one of the laments of foreign investors in the Philippines. There are only a few liquid and sizable stocks for large foreign investors or funds.

While the sentiment from the conference remained overcast, I left it with a little spring in my step. Investing in the Philippines is not hoping against hope. Investors are awaiting the fixes to the current problem of corruption. While waiting, there is no harm in staying with companies that are taking care of their shareholders with healthy returns via dividends. The Philippine economy and stock market may not be the racecar you want, but it is the reliable train you need.