Three Events That Will Shape the Financial Market in the Next Five Years
By: Mr. Alijeffty Gonzales
Starting the New Year with a bang, the Professional Insurance and Financial Advisors Association of the Philippines (PIFAAP) held its first special interest session featuring invited investment guru Alijeffty Gonzales from Insular Life who delivered a talk entitled, “The Three Events that will shape the Financial Market in the next Five Years.”
The stock market is the ideal economic barometer through which the astute financial adviser can monitor the rise and fall of stocks in light of the economic environment. No matter how promising a business is, or no matter how affordable its stocks are, it will all be for naught if the economic environment is not conducive to its growth.
To illustrate, despite the fact that the Philippines has an impressive GDP level, which demolishes its “sick man of Asia” status, in 2013, the country only ranks only at number 120 among all the countries in the world, with USD 6,597 per capita GDP, according to the World Bank.
The country’s economy is also slowing down. During the latter part of 2013 and the early part of 2014, the Philippines registered a GDP growth of up to seven percent, which went down in 2014’s last quarter to 5.3 percent. Gonzales explained that this was all due to a shift in the operating environment. The early boom of the country’s GDP could be attributed to a broad-based growth, wherein more companies and businesses share the economic pie. It all changed when selective growth crept in, giving some companies and businesses a bigger slice of the pie.
Despite the highs and lows of GDP growth, the fluctuation that the Philippine economy experiences is still manageable. According to investment pundits, at the rate of six to eight percent GDP growth within the next ten years, the trickle-down effect can stoke inclusive growth. With enough profits, businesses can come up with more products for the middle class, which can induce higher demand, and in turn create more jobs for the majority of the population.
Gonzales enumerated three key events that financial advisers must watch out for during the next five years: oil prices, monetary policies and the elections in 2016.
WatchList #1: Oil Prices
Oil, which is a main source of fuel in countries, is vital for economic growth. It has been said that the more a country consumes energy, the more its businesses will grow. However, countries are now taking a different approach in light of recent studies on climate change, which points to carbon emissions as culprit. Because of this, alternative fuel is now taking the spotlight, along with other sources of energy that are clean and ultimately good for the environment.
Until the world comes up with an affordable and accessible source of clean energy that will be readily available to all, oil (particularly fossil fuel) will still be vital to the economy. Gonzales revealed that the following are the main determinants of oil prices; on the demand side we have the state of the global economy and emerging economies that need it for growth. And on the supply side, we have the OPEC and the politics involved.
The politics involved in oil exporting are particularly interesting. Scientists have found out that fossil fuel is a finite resource, and this led to the “oil peak theory.” Fossil fuel is formed from the remains of dinosaurs and other prehistoric creatures that have been buried for millions of years. It will run out eventually but scientists estimated that the amount of fossil fuel extracted from the earth would have already peaked by 2011.
It is a well-known fact that OPEC is king when it comes to fossil fuel exports. The U.S. wanted to also get into the game by developing another type of fuel, “shale oil,” which is extracted from carbon deposits underground. During the past decades, shale oil was considered too expensive to be used as fuel, but the U.S. found means to drill it cheaply, thus giving OPEC a run for its money.
The OPEC and the U.S. are butting heads to dominate the oil market. However, since OPEC was a player long before the U.S. became one, it had enough accumulated cash that would enable it to sell oil cheaper than the U.S. Gonzales stated that the winner of this game is the one with the most patience and the one who can sell the cheapest. So far, OPEC is winning.
The lowering of oil prices can be a short-term boon for oil-importing countries like the Philippines. We benefitted from these cheaper prices. The recent US$5-drop in oil prices translates to savings of US$ 2.32 billion.
Gonzales, though, expresses a caveat. A rapid decline in oil prices can be too much of a good thing and can even be frightening. Economic think-tank Bruce McCain compared it to a person who is on a diet that managed to lose 75 pounds within a month.
For example, Russia is the leading oil producer in 2013. Around 62 percent of its GDP relies on oil exports. Lower oil prices dragged its GDP down, which is a frightening economic scenario. The last time that Russia defaulted in 1998, it caused market volatility around the world, which was considered even greater than the Asian financial crisis in 1997.
WatchList #2: Monetary Policies
This leads to the next event that financial advisers must watch out for: the impact of monetary policies around the world. Economic growth is also determined by the availability and the cost of money. Market volatility can cause the clamour for more liquid money. Problem is, countries can take the wrong step in addressing this. If monies are unchecked to accommodate demand, it can inevitably result in inflation, which in essence, according to Milton Friedman, happens when too much money chases too few goods.
WatchList #3: Elections
Finally, the third event to watch out for is the 2016 presidential elections. Notwithstanding the coming elections being transformed once again into a nationwide circus, and whoever wins the presidency, it has been forecast that the Philippine economy will remain relatively unscathed. The 6 to 8 percent growth in the country’s GDP will be unaffected by the political atmosphere because of the presence of constant growth drivers such as the BPO boom and OFW remittances.
Lessons from Top Investors
There are valuable lessons that can be learned from the top five investors around the world: Warren Buffett, Philip Carret, Walter Schloss, Shelby Davis and John Templeton. These men have one thing in common: they all made long term plans in their investments and were able to reap the rewards because they weren’t emotionally affected. Case in point is Warren Buffett who got into investments at the early age of 19 and held on to them. Looking back, Buffett realized that 99 percent of his wealth right now was only accumulated after the age of 50. Having a long-term holding period has proven to be a wise decision indeed.
Two other lessons: diversify in order to hedge against potential losses and invest regularly in any market condition. According to Shelby Davis, one can make the most out of his/her money during bear markets even if he doesn’t realize it at that time. John Templeton, who created some of the most successful investment funds and founder of Templeton funds, believes in this principle. According to him, one must diversify his investments by doing things differently from the crowd. Furthermore, we must invest at the point of maximum pessimism.
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The Professional Insurance & Financial Advisors Association of the Philippines (PIFAAP), a non-stock, non-profit organization, is an exclusive network of professionals engaged in the sale and marketing of life, non-life and pre-need products, bancassurance, and mututal funds. PIFAAP is recognized and accredited by the Million Dollar Round Table to certify for member applicants to MDRT. For more information, you can visit www.pifaap.org