Investing in the stock market: Part 2, the macro view

In order to mitigate the inherent risks and be smart about investing in the stock market you start with the macro view of the fundamentals of the investment climate which should be both global and, of course, reflective of the country’s economic environment.

Why even consider the global perspective?

Well, we live in an interconnected and interdependent world. If the Western countries like the US and the EEC are in recession, world economic activity falters and consequently, demand for our country’s products and services weaken. As a result, our economic growth activity or GDP slows relative to other countries. International investors who watch closely the GDP of the various countries they are invested in start rebalancing their country portfolio mixes. Some countries lose out while some gain in the process. Judging from the pullback of foreign funds from our market the past few months, it seems we have been unfairly judged as one of those who might lose out in an imminent global trade war notwithstanding the fact that we continue to enjoy robust GDP growth rates.

Our local setting is, of course, the most important factor to consider.

As an investor, we need to do our best not to be carried away by the emotions of a market downturn and instead focus on the fundamentals of our economy. For instance, is our GDP growth sustainable? Our leading economists seem unanimous in concluding that YES we still are very much in a growth mode. The aggressive infrastructure program of the administration is expected to be a big boost. The TRAIN Package 4 which is focused on the financial markets and which promises to be a stimulant to the capital market environment is another.

There are, however, danger signals that a smart investor should look out for, one of which is the biggest elephant in the room now, the inflation scare.

In basketball, the elephant in the room for fanatics like me is of course the possible repercussion of the recent “basketbrawl” involving Gilas and the visiting Aussies. Will the FIBA sanctions wipe out our Gilas line-up or worst-case, will we lose the hosting of the 2023 FIBA Basketball World Cup? For stock market investors, what is the elephant in the room today? Recent inflation numbers are at a five-year record high of 5.2 percent.

Certainly this is worrisome and something to watch closely in the next few months. The down movement of the peso exchange rate relative to the US dollar adds fuel to the concern of foreign funds currently positioned in our stock market. Anticipating further deterioration of the peso typically prompts foreign funds to unload more stocks that dangerously could lead to a vicious cycle. The BSP may not have much choice but to bump up rates some more in order to curb growing concerns. The resulting high interest rate environment is usually the antithesis of investing in the stock market. The reason is simple: when fixed yields on debt instruments rise, this investment option becomes a more attractive proposition for the investors compared to the perceived vagaries of the stock market. Sometimes the adage that the better part of valor is prudence is a smart way to manage the risks involved in investing in the stock market. The market today is at best on a sideways moving which means: if you are not in it, then it might be best to sit tight and position your money temporarily in short-term fixed-income securities until the smoke clears. If however you are in the market already, review your position and separate the companies that have sound fundamentals from those whose prospects are shaky.

But that topic my friends, segues into my next column and until then…one big fight!