Despite Economic Turbulence: Financial Markets can Recover JCFAP, La Salle MANILA, Alexander Gilles, CFA Nov 29, 2008

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Recent events We have the impression that there is a “crisis.” A crisis is a Bad Trend, that is compressed in time. If it wasn’t so abrupt, it would not be called a crisis.

We have the impression that there is a “crisis.”

A crisis is a Bad Trend, that is compressed in time.

If it wasn’t so abrupt, it would not be called a crisis.

European stockmarkets, 1999 -2007 [email_address] There is no lack of investment opportunities despite volatile markets. Markets have often been volatile – and yet upward bound,

Japan stocks, 1999 - 2007 [email_address] There is no lack of investment opportunities despite volatile markets. Markets have often been volatile – and yet upward bound,

Large-cap stocks in USA, 1999-2007 [email_address] There is no lack of investment opportunities despite volatile markets. Markets have often been volatile – and yet upward bound,

Msci world index, 1999 - 2007 [email_address] There is no lack of investment opportunities despite volatile markets. Markets have often been volatile – and yet upward bound,

Support and Resistance, waves of upward motion From the Basic Textbook [email_address] This is not “Greed and Fear”, Boom and Bust, Panic and Irrational Exuberance.

Support and Resistance, waves of upward motion

Recent declines: Two steps up Two steps up One step down One step down FOUR steps up One giant step down Usually:

Methods of analysis Technical Fundamental Market Psychology. Historical Patterns What actually happened in previous crises? What were BUYERS and SELLERS thinking?

Crisis 1997, yes – 98. Followed by Recovery. Long decline 2000 – 2004, followed by Recovery Then, abnormally LONG rally 2004 – 2008 with no zags. Example: Philippines Index

Crisis 1997, yes – 98. Followed by Recovery.

Long decline 2000 – 2004, followed by Recovery

Then, abnormally LONG rally 2004 – 2008 with no zags.

Where others see two crashes, I see two recoveries. Will be resilient Was resilient… Will Recover

Where others see two crashes, I see two recoveries.

Scenario of potential 1998 2000 2002 2004 2006 2008 2010 2012 2014 7000 6000 5000 4000

Lessons of History. Proven facts. PLDT stock: 18% a year, for the last 18 years High Risk Low Risk Low % High % Jollibee: 14% a year, for the last 14 years BPI: 11% a year, for the last 11 years Bank Deposits: 3% Inflation: 6%

U.S. stock market History and Trends

“ Trapped” in 1960- 1980. Then released, like a coiled spring. Example: USA

Steep declines in 1987 led to doomsday scenarios. Investors thought the world (markets ) would die. Overwhelming trend has been upwards (progress) Despite Black Monday 1987.

Broad market index since 1950 [email_address] The trend is an established positive march decade after decade, despite worse recessions.

If you believe in progress, in the computer age, and globalization, then growth will be manifested. 19,000 18,000 17,000 16,000 15,000 14,000 1990 1995 2000 2005 2010 2015 2020 2030 If you have never seen a Dow Jones index above 14,000 ever before, your natural reaction is to consider it impossible. . Because it has never happened before.

If you believe that the US economy has failed permanently, that there is no solution: this is the outlook. This scenario implies that, Americans would be applying for work in Mexico. 19,000 18,000 17,000 16,000 15,000 14,000 1990 1995 2000 2005 2010 2015 2020 2030

It’s just waves Support and resistance Trendlines What the media calls “ internet bubble” Real-estate boom & bust . . . Is normal wave after wave upwards So-called “greed and fear”

Support and resistance

Trendlines

What the media calls

“ internet bubble”

Real-estate boom & bust

. . . Is normal wave after wave upwards

So-called “greed and fear”

Support and Resistance, waves of upward motion From the Basic Textbook [email_address] This is what outsiders call “Greed and Fear”, Boom and Bust, Panic and Irrational Exuberance.

Support and Resistance, waves of upward motion

[email_address] Trendlines are often upwards, due to Earnings Volatility: due to normal push-and-pull, of buying and selling. DO NOT forecast a “permanent collapse.” IF YOU SEE A DIP…

Good traders are Optimistic. I’m going to win this race. Ain’t nothing gonna stop me.

All businesses get hit by disaster [email_address]

KEY: Navigate around Danger Zones Start Business A high-value enterprise Challenge Bankruptcy Shipwreck Political problems Recession Cutthroat Competition Labor unrest Danger Lawsuits

Healthy returns; good payback It is no different from the hope of the business owner For getting “money back” In the RED Break even Positive cash flow [email_address]

Strong Probability Moderate Probability Weak Chances of Profit Go for Long-Term Trades

The Philippines Additional Reasons for Hope. Expect a Recovery.

Economic Output : US$144 billion Up 7.3% in 2007. Slower in 2008 GDP per capita: $3,300 (via PPP) 2009

GROSS DOMESTIC PRODUCT, PHILIPPINES 000 pesos 2007 at current prices 2007 constant prices GDP 6,651,320 1,370,018 OR P6,651,320,000 P1,370,018,000 Consumption 4,615,831 1,059,466 Investment 980,002 239,667 Gov spending 654,132 89,523 Export 2,729,849 648,297 Import 2,778,645 620,329 X-Im -48,796 27,968

GROSS DOMESTIC PRODUCT, PHILIPPINES 000 pesos

2007 at current prices 2007 constant prices

GDP 6,651,320 1,370,018

OR P6,651,320,000 P1,370,018,000

Consumption 4,615,831 1,059,466

Investment 980,002 239,667

Gov spending 654,132 89,523

Export 2,729,849 648,297

Import 2,778,645 620,329

X-Im -48,796 27,968

Economy in 2007, 2008, 2009 Expected to be weaker Not as good as the 7% of 2007. Down-cycle. 7% 4% 2% 4% 6%

Expected to be weaker

Not as good as the 7% of 2007.

Down-cycle.

Econ Growth Cycle 2008 1998 7% 5% 2007 Philippines

Financial health

Savings rate 18% in 1986. now up to 25% Inflation rate: 12%  down to 5% Taxes as % of GDP: higher Interest rate in 1986: 25% now down to 3% Differences 1980s  PRESENT

Savings rate 18% in 1986. now up to 25%

Inflation rate: 12%  down to 5%

Taxes as % of GDP: higher

Interest rate in 1986: 25% now down to 3%

Dollar-earners Exports to USA, may decline, if US economy slows down. But P/$ exchange rate is favorable now, for PHIL exports. OFWS in USA: teachers and nurses. (Not finance professionals) Still have a job. BPO sector: still fast growing. Has only tapped 4% of the US market. Tourism: admittedly weak

Exports to USA, may decline, if US economy slows down. But P/$ exchange rate is favorable now, for PHIL exports.

OFWS in USA: teachers and nurses. (Not finance professionals) Still have a job.

BPO sector: still fast growing. Has only tapped 4% of the US market.

Tourism: admittedly weak

Sources of Energy 1980 2008 GEOTHERMAL 0 18 CRUDE OIL 83 8 HYDROELECTRIC 17 17 NATURAL GAS 0 29 COAL 0 27

CPI Inflation 2008 2003 8% 2% Rice, Fuel Philippines

There may be no correlation National Economy National Economy PSE INDEX PSE INDEX

Next few years PSE INDEX rises due to local PESO investment and foreign $ portfolio investment. National Economy National Economy PSE INDEX PSE INDEX National Economy PSE INDEX

Plan of action. Levels of rebound. expected3 expected2 Eventually… ? expected1 I hope it BOUNCES off the 23% LEVEL I hope it BOUNCES off the 38% LEVEL [email_address] I hope it BOUNCES off the 62% LEVEL

Capital-raising: Via Stockbrokers Private-Equity Funds Venture-Capital Funds Financial Advisers. Consultants. capital-raising consultants [email_address] MOBILE: 0917 8264986

Capital-raising:

Via Stockbrokers

Private-Equity Funds

Venture-Capital Funds

Financial Advisers. Consultants.

Ask about: Economic prospects Financial-market outlook Financial education: seminars Tutorials: savings & investment Any questions? [email_address] MOBILE: 0917 8264986

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