VIRTUAL REALITY: Time to buy stocks

By Tony Lopez

Banks have reduced the in­terest rate they offer for deposits, from an average of 2 percent before the current financial crisis to half a percent this year. The shenanigans of the Legacy Group of businessman Celso de los Angeles have become public knowledge. Pre-need plans have gone out of fashion, thanks to Legacy, the failure of CAP and the controversy behind Pacific Plans. Insurance also offers doubtful outlets for investment following the losses of AIG, mother company of the Philamlife group in the Philippines. AIG lost a whopping $61. 7 billion in the last quarter of 2008, the biggest quarterly loss in US corporate history. AIG has received $170 billion in US government loans and capital infusion, yet is giving away huge bonuses to its officers and employees (using American taxpayers’ money). Not surprisingly, Obama is outraged, and so is the American public.

Amid this backdrop, investing in Philippine stocks is suddenly an attractive option. Stocks are selling at nine times the earnings of their companies. Ayala Corp. sells for only five times expected income. If you can wait for two years, there is a good chance you can double your money if you buy stocks now.

Companies listed in the Philippine Stock Exchange represent the country’s largest, the crème de la crème of local business. Many have been around for at least 100 years and are venerable names–like, Ayala (175 years old), Bank of the Philippine Islands (157), San Miguel (119 years old), Meralco (90 years), Philippine Long Distance Telephone (81 years), Tanduay (71 years), and even SM (51 years old). These companies have seen wars and revolutions, survived ups and downs, ridden booms and busts. In other words, they are stable.

Meanwhile, the economy, is projected to grow between 3 percent and 4 percent this year even while two-thirds of the world is in recession.

There is plenty of money. Banks are awash with cash. People have money. Filipinos save an average 28 percent, as a ratio of GDP, equivalent to P2.1 trillion. Filipino expats, ten million of them, remitted $16.4 billion in 2008 on top of the $15 billion they remitted in 2007. In January 2009, they remitted $1.3 billion, up 0.1 percent from January 2008. The Arroyo administration has plenty of cash, with P330 billion in stimulus plan. That money is now being spent on infra and transferring cash to the poor.

Beginning this year, corporations will make an additional 5 percent on their income as a result of the reduction of the corporate income tax to 30 percent from 35 percent. Also, says PSE President Francis Lim, “corporations are now subject to higher corporate governance standards. There is transparency and accountability in large-scale projects.” Lim has worked on a number measures to improve the attractiveness of the stock market and encourage more savings, by workers and would-be retirees. Among these reforms are: the Real Estate Investment Trust or REIT, the abolition of the documentary stamp tax and the IPO tax, the PERA Law, and the Corporate Recovery and Insolvency Act.

The REIT law grants incentives to property companies that have a regular stream of income and declare 90 percent of that as dividends, provided at least 30 percent of their ownership is held by the public thru listing in the PSE. The dividends declared are not taxed.

The PERA Law encourages workers to set aside P100,000 every year (P200,000 for families) for investment in listed stocks. All income from this investment is tax-exempt.

Both the REIT and the PERA Law seek to tap the vast savings of OFWs for investments in the stock market. OFWs remit only a third of their total income and keep the rest because there are just few outlets for their savings if they remit everything to the Philippines. The Corporate Recovery and Insolvency Act provides for orderly bankruptcy and insolvency proceedings for corporations.

The overall effect of these proposed reforms is to encourage more investments in the stock and increase the number of corporations going public. This will spur investments, the formation of more corporations, the setting up and expansion of businesses, resulting in a dynamic and fast growing economy and greater wealth benefits to a wider segment of the population.