[0:00]Hello everyone. Welcome to the course, Security Analysis. If you are a student, a prospective investor or an existing shareholder of a publicly listed company in the Philippines, then it pays to understand macroeconomic and industry analysis. Amidst the local and global uncertainty brought about by COVID-19 pandemic. Have you ever asked yourself this question? How is the Philippine economy today? Let's take a look at some of the headlines during the last week of January 2021. The Philippines GDP is projected to grow by 7.7% in 2021. Good news, right? Other analysts were saying that there will be a 7.4% economic growth. However, we will also be seeing a faster inflation rate this year. As to Fitch, one of the international credit rating agencies, it has given the Philippines a triple B credit rating, which basically means the economic outlook for the Philippines is stable. The Philippine labor market is also recovering despite having more than 2 million Filipinos who have lost their job as of the end of 2020. And one of the local agencies reiterated that the worst is over for the Philippine economy. This signals a green shoot of recovery for the Philippines.
[1:36]Some of the essential questions on macroeconomic and industry analysis are the following. What are the primary macroeconomic and microeconomic influences, and how do they affect the stock or security market in general? How do investors or prospective investors like you and analysts organize their analysis and portfolio decision based on the risk-return characteristics of sectors and industries? And it pays to know what is the overall health of the economy, and what can we do as Filipino citizens to contribute to economic development? So for today's video, the intended learning outcome are the following: be able to construe if there is any empirical relationship between the aggregate economic variables such as GDP, inflation, interest rates, etc., and that of the aggregate stock/security market. Assess the profit potential, growth prospects and downside risks of specific sectors in the Philippines, such as the three major economic sectors: we have agriculture, industrial and service, and the different industries under each of these sectors. Develop awareness of the past and current economic and stock market events, extract wisdom from the learnings of the past, and formulate own investment strategies and philosophy. If somebody asked you, how is the Philippine economy today? How do we measure the size of an economy, or how do we measure the overall health of the economy? One of the best indicators is to look at our gross domestic product or the GDP growth rate. But it does not give us a full picture of the whole economy. So we have to consider the other macroeconomic indicators such as interest rate, inflation rate, unemployment rate, balance of trade, credit rating, among others. So let's start first with gross domestic product or GDP. GDP is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. So what are these final goods and services that we're talking about and how do we compute for GDP? So let us put it this way: GDP includes all the money that you spend for your shopping, like when you buy shoes or bags. When you drink coffee at Starbucks, when you buy gadgets, laptops, cell phones, when you pay for a haircut in a salon, when you buy groceries or eat in a restaurant, or buy a house. So they are personal consumption and they are included in the computation of GDP. Also included of course is the amount that businesses or local companies spend on buying machinery or equipment or technology for their businesses. And of course, the amount that the government is spending for infrastructures and other public services. There are actually three ways to measure GDP: expenditure approach, income approach, and production approach. But one of the most popular approaches to measure GDP is through the expenditure approach. And this is how we compute for it. We simply get the sum of consumption, investments, government spending, and net exports. So net export is simply exports minus imports. So these are the four components of GDP. We have consumption, investment, government spending, and of course net exports. Personal consumptions, these are what individuals like us spend our money on, like groceries, buying gadgets or house. These are all personal consumptions. And of course, investments, this is what local companies or businesses are spending their money on. Example, when they buy technology, when they buy property, equipment, payroll, and then government expenditure. This is what the government spend their money on. For example, infrastructures or providing public services such as free hospitalization or vaccine, providing free education specially in public schools, providing military service for peace and order and a lot of other things. And net exports, ideally, our exports should exceed imports. However, when imports exceed exports, there is what we call a trade deficit. Now, let's take a look at the GDP growth rate of the Philippines for the past three years. As you can see here, the growth rate of the Philippines has been very consistent for the past two years, and then at the onset of the pandemic, it posted a negative 0.7% GDP growth rate. And the lowest of which is negative 16.9%. No wonder why the president had reiterated that the Philippines could no longer take any more business shutdown. They are forced to allow workers to go back to work so as to continue our economic movement.
[7:04]If you look at the 10-year GDP growth rate of the Philippines, you could really see the Philippines growth rate is consistent. That's why we are regarded as one of the fastest growing economies in Asia and in the world. Now, let's talk about inflation rate. How do we define inflation? Inflation is the general increase in prices. It means an increase in the cost of living as the price of goods and services rise and thus decline in the purchasing power of money. Inflation basically means that our money won't buy as much today as you could yesterday. So if the prices of goods rise, like for instance, groceries or vegetables, the same amount of money will purchase a smaller quantity of goods. So it means to say, habang tumataas ang presyo ng mga bilihan, lumiliit naman ang kakayahan ng pera natin na makabili ng mas marami. There are different causes of inflation. It could be internal and external. So one of the internal causes of inflation is when there is a surge in the prices of properties. When there is also a higher wages or labor costs, when there is an oversupply of money in the circulation, and rise in business taxes. And there are also external causes of inflation, and this is something that we cannot control. For example, oil prices. So it's being dictated by the global market since more than 90% of our oil is imported. So companies like Petron, Shell, Caltex, they pass on to consumer any increase in the prices of oil or fuel in the global market. Another cause of inflation is, we're also affected when there is inflation in the global market. And of course, depreciation of our Philippine currency. Now, there are two types of inflation. There is what we call cost-push inflation, which is brought about by a rise in the cost of production. For example, higher oil prices. One of the reasons why there is an inflation or increase in the prices of commodities is because of a higher cost. So businessmen, local companies are passing on to consumers any increase in the cost of their production. Another type of inflation is what we call demand-pull inflation. It basically arises when there is an aggregate demand. Why is the price of iPhone continues to rise? It's because there is a demand for iPhone. People are lining up to be able to buy the latest model from iPhone. Some would say that inflation is not good at all. On the part of consumers, definitely yes. But we have to understand that inflation itself is not really bad at all, especially if the economy is concerned. Like for instance, with a demand-pull inflation, it is brought about by demand. So the higher the demand, the higher is the inflation, or the higher the prices of goods and services. And a higher demand is good for the economy. When there is a high demand, local companies are forced to produce more. Local companies would need more workers, and having more workers is definitely good for the economy. It can provide more jobs to Filipinos, improve the quality of life of employees or workers, raise more money to fund for the education of the children and other things. So a higher inflation is generally negative for stocks because it causes higher market interest rates and more uncertainty about future prices and costs, and it harms firms that cannot pass through cost increases. Although these adverse effects are true for most industries, there are some industries that benefit from inflation. Natural resource industries benefit if their production costs do not rise with inflation, because their output will likely sell at higher prices. Industries with high operating leverage benefit because many of their costs are fixed in nominal (current dollar) terms, whereas revenues increase with inflation. Industries with high financial leverage may also gain, because their debts are repaid in cheaper dollars. Investors who anticipate an increase in the rate of inflation would expect to increase their required rates of return by the same amount to derive constant real rates of return. Now, let's take a look at the inflation rate. Last December 2020, the inflation rate in the Philippines is 3.5%. So you would hear some people commenting that, wow, this is too much. The prices of commodities are getting high and it's true because over the past 12 months, okay, 3.5% is indeed the highest. So in May of last year, our inflation rate is 2.1%. But if you look at the 10-year inflation rate in the Philippines, there are in fact years, okay, that posted a higher inflation rate than that of this year. Now, let's look at interest rates and how does it affect our investment decisions and the economy as a whole. Financial institutions, including banks, are adversely affected by higher rates because they find it difficult to pass on these higher rates to customers. High interest rates clearly harm the housing and construction industry, but they might benefit retirees whose income is dependent on interest income. So a very classic example of this during the financial crisis of 2007-08. It is also known as the subprime mortgage crisis, which happened in the United States. This has something to do with the higher interest rates on the mortgages on the housing market, which also caused a failure of several major investments like commercial banks, mortgage lenders, insurance companies, and other financial institutions. This is our interest rate compared to higher interest rates in 2019, in 2016, and in 2012. And over the past 25 years, our interest rate in the Philippines today is still very much low. Okay, one of the indicators if the economy is doing well or not is to look at the unemployment rate. When we say unemployment rate, it is defined as the percentage of unemployed workers in the total labor force. It is widely recognized as a key indicator of the performance of a country's labor market. Unemployment rate has a wide-ranging impact across the country and the economy. When we say employed workers, we mean to say people with jobs. People who are jobless, looking for jobs, and available for work are unemployed. People who are neither employed nor unemployed are not in the labor force. So who makes up the labor force? These are the employed and the unemployed people. The remainder consists of people who have no jobs and are not looking for any type of job. So they include students, retirees, and housekeepers. Now, credit rating is also one of the key indicators to to gauge the overall health of the economy. And we know for a fact when international credit rating agencies like Fitch, Standard & Poor's or Moody's give us a very good credit rating, it's a good indication that our economy is doing well. A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. In fact, any creditor or lender would have that we call trust and confidence based on the credit rating. So a credit rating not only determines whether or not a borrower will be approved for a loan or debt issue but also determines the interest rate at which the loan will need to be repaid. So the Philippines as a whole as an economy gets a credit rating from the international credit rating agencies. And of course, some of the local companies in the Philippines are also being assessed. So a credit rating or score can be assigned to any entity like the government or local companies that seeks to borrow money. A high credit rating indicates a high possibility of the government or local companies being able to pay back the loan without any default. And a poor credit rating suggests that the borrower has had trouble paying back loans in the past and might follow the same pattern in the future. So the credit rating affects the entity's chances of being approved for a given loan or receiving favorable terms for said loan. So the higher the credit rating is, the better, especially if these credit ratings come from Fitch, Moody's, and Standard & Poor's.
[18:08]Now, let's talk about balance of trade. Okay, what are the factors that affect a country's balance of trade? Balance of trade is defined by its net exports. So exports minus imports, and ideally, our exports should exceed our imports. Okay, there are factors that we need to consider like endowments, productivity, trade policy, exchange rate, foreign currency reserves, inflation, and demand. Okay, when we say trade surplus, it means exports are greater than imports. And when we say trade deficit, our imports are greater than our exports. And this happens, especially with the golden age of infrastructures, many of the raw materials that we need to to build highways, roads and skyways are sourced out abroad. Especially the steels, cement and everything. So there is a higher importation of raw materials. So it can result to a trade deficit.
[19:30]Now, let's move to the core of this discussion, which the economy and stock market have a strong empirical relationship. But did you know that the stock market or security market generally moves before the economy does? Therefore, the best macroeconomic projection techniques use economic series or events that likewise lead to the economy or possibly the stock market. So this is one of the reasons why some Filipinos would say that they do not really feel the progress or the improvement in the quality of their life. The economy moves slower compared to the Philippine stock exchange. And like investors or analysts in the stock market, they can easily get affected on a day-to-day basis because the prices of stocks fluctuate on a per time basis. So if you would like to know where the economy is going, one way to do it is to look at the Philippine stock exchange first. Although it is not the ultimate projection that you can use, okay, to predict what's going to happen in the economy, but somehow, it could give you an indication, a very strong indication of the health of the economy. As of January 29, 2021, this is our Philippine stock exchange index performance. So you would see people commenting on social media that this is indeed very risky for investors. And a lot of investors were thinking whether to pull out their money or stay the course. Okay, so if you look at the chart, you would see here at 6,612.62 points, yes. Okay, the, the stock market has declined and you would see that during the first quarter of 2020, March, April, we have seen the worst in the Philippine stock exchange. But if you look at the 10-year performance of our PSEI, what can you see? Okay, and although we have experienced a decline in our stock exchange index, you would see here that this is not the lowest so far. Okay, this is not the worst so far, right? So there are years, like for example, 2008, 2009, this is brought about by US financial crisis, the Asian financial crisis. So the prices of stocks go up and down, but over the long run, what have you noticed? Still, the trend is going up. And if you look at the 30-year performance of our PSEI, you would definitely see here that this is not the worst on record. This is not the worst performance of our stock exchange. People were asking how is the Philippine stock market today? Okay, is this the worst year for PSEI? Is this a good time to buy more shares of stocks? Is this the best time for me to sell my stocks and capitalize my profit? If you're going to ask me, there is really no reason to panic, especially if you are a long-term investor. When your mindset is to compound the growth of your money over time. So imagine your parents or grandparents investing in 2010. 10 years after, even with a decline today, they are still earning. And especially if your parents or grandparents invested 20 years prior. So imagine if they're able to buy here and then the stock market's performance is here, they haven't lost money at all. In fact, they have gained money over time. Now, let's proceed to industry analysis. Okay, why do we need to conduct industry analysis? Okay, as prospective investors, we would like to know in which type of industry should we put our money? Okay, investment practitioners perform industry analysis because they believe it would help them isolate investment opportunities that have favorable return risk characteristics. What exactly do we learn from an industry analysis? This is a common question: Can we spot trends in industries that make them good investments? Are there unique patterns in the rates of return and risk measures over time in different industries? And some of the questions that we often ask, especially you as prospective investors or existing shareholders, okay. Do industries have different returns and risks over a specific time period? Okay, which industry performs well or is thriving? Okay, which is defensive during this time of pandemic, which is cyclical, which industry is affected when crisis happens like COVID-19? In what industry can we better put our money? And which of these industries or sectors are consistent over time? Okay, saang industriya kaya o sector sa Pilipinas mas magandang mag-invest ng pera natin, 'yung alam natin na very promising 'yung magiging returns natin, or if there are risks, ay minimal lang. So aling kaya ang industriya or sector diyan sa Pilipinas? So to further understand, let us take a look at the three major economic sectors in the country. So we have agriculture, industrial, and service. It's sad because the Philippines is an agricultural country and yet, less than 20% is being contributed by the agricultural sector. Okay, and the agricultural sector is composed of farming, fishery, livestock and forestry. Now, industrial, during the time of Fidel Ramos, his slogan has something to do with the Philippines 2000. This is where manufacturing companies and industrial companies brought in the technology. This is the emergence of electronics companies in the Philippines. And if you look at the contribution of the industrial sector in the gross domestic product, it's actually contributing 30% of the output. So industrial includes construction, manufacturing, electricity, gas, water, mining, and quarrying. Now, let's take a look at the service sector. Overall, we could say that the service sector today is the greatest contributor to our GDP. In fact, it is contributing more than 50% of the total Philippine economic output. Okay, so ano na ba 'yung mga services? So it includes transportation and communication, financial intermediation, real estate, and of course, the emergence of BPOs or call centers. And also included there is the tourism. So ito daw ang pinakamalaki na nagco-contribute ngayon sa ating GDP. But if you look at the 30-year performance of the economic sectors, you would really see that ang agriculture ang nangunguna before. Which sector do you think would give you a more profitable option? Where do you think would you be putting your money? Okay, in the agriculture sector, in the industrial sector, or in the service sector? And if you look at the different industries in the Philippines, okay, those sectors are subdivided into industries. We have banks. Okay, should you put your money in other financial institutions? Or should you buy shares of stocks of electricity such as Meralco, energy, power and water, such as Manila Water Corporation? Food and beverages like Jollibee Foods Corporation, like San Miguel Corporation. And then we also have construction and infrastructure, the real estate companies, we have Ayala Land Incorporated, SMDC. Um, chemicals. We also have electricals, and media, all right, telecommunications, transportation, hotel and leisure, education, casinos and gaming, mining among others. And there are other industries in the Philippines. Now, as prospective investors, this is the reason why we are studying macro economy and industry is for us to be able to identify in what sector or industry should you better put your money. Which among these industries could provide you a higher potential rate of return or could actually give you a more tolerable risk.
[31:33]In my next video, I'll be sharing with you the top 30 corporations or publicly listed companies in the Philippines as of January 2021. It's very interesting because we will try to dig into the fundamentals such as their management, who are the board of directors of the company, the vision and mission of the company, and of course, the marketing strategies, the operation side, the technicalities. And last but not the least, the financial statements of these companies. These are the top 30 companies in terms of market capitalization. So we will try to understand what market capitalization is in the next video. So that's it. I'll see you guys next time. Bye.
