Financial markets worldwide have exhibited extremely erratic behavior in the past two weeks. Locally, the stock market posted last Thursday its worst performance since the subprime crisis in 2008. The peso was similarly battered, falling from a high of 40.83 to a dollar to breach the P43:$1 mark (many analysts and economists had predicted the opposite). The local bourse hit its lowest level this year. The benchmark Philippine Stock Exchange index plunged 442.57 points (or 6.75 percent) in just a day last Thursday to 6,114.08. It was the biggest single-day loss since Oct. 27, 2008, when the local price barometer tumbled 12.27 percent just a month after investment banking giant Lehman Brothers collapsed, triggering the world’s worst financial crisis since the Great Depression at the end of the 1920s.
With the benefit of hindsight, analysts said the market had risen too fast and too soon. The PSEi peaked at 7,403.65 last May 15, a level earlier forecast to be hit by 2014. As a stockbrokerage pointed out earlier, “valuations have become a concern due to positive sentiment that drove market levels to yearend expectations all by the first quarter of the year, outperforming most global markets.” The market’s bull run began in early 2009. So far, the PSEi has retreated by nearly 15 percent from that peak in May. A pullback exceeding 20 percent is usually interpreted as a reversal of the trend to a bear market. But since the start of the year, the index is still ahead by about 8 percent.
The downturn is not peculiar to the Philippines. Also last Thursday, stock markets in Asia fell heavily, with prices in Bangkok and Jakarta mirroring a plunge of 6.35 percent on the Tokyo bourse, bringing Japan’s key stock index down more than 20 percent from its recent peak.
The reason for the global uneasiness is the speculation that the US Federal Reserve Board will scale back its easy-money or low-interest rate policy. Last May 22, Fed Chair Ben Bernanke told the US Congress that the Fed might scale back stimulus efforts if the US employment outlook continued to improve.
The Fed has been buying bonds to push down market interest rates to near-zero levels. Theoretically, low interest rates should spur lending to productive activities that, in turn, should lift the overall economy. The Fed does this by injecting liquidity into the system through the purchase of $85 billion worth of securities a month. Speculation that the Fed may wind down this stimulus—and consequently lead interest rates higher—has led fund managers to dump emerging-market stocks and buy US assets. For instance, foreigners were net sellers at the local bourse last Thursday by P1.65 billion. This was the same picture in emerging markets from Asia to South America.
As foreign investors exchange the proceeds from the sale of their emerging-market stocks to dollars, demand for the greenback rises, thus leading to its appreciation. This is why the peso and other currencies have lately been depreciating in value. A rising dollar and higher US interest rates have adverse effects on developing economies in terms of capital flight. In fact, monetary authorities of countries like Indonesia have raised their domestic interest rates to stem the outflow of capital.
Top Fed officials are meeting this week in Washington to assess the state of the US economy and tackle interest rates and other policies. Most economists expect US interest rates to remain steady. Bernanke was reported as saying that the Fed would continue efforts to stimulate the economy until further improvements in the unemployment situation. Last week’s US jobs data provided some calming effect on global markets as these suggested that a recovery in the world’s biggest economy was not strong enough. This was behind the weakening of the dollar last Friday after gaining much of the week.
Volatile events in financial markets like the one seen this June are usually temporary. In the longer term, economic fundamentals determine the path that the country will take. Economists and market analysts agree that the Philippines has strong economic fundamentals—billions of dollars in remittances from overseas Filipinos, an improved fiscal position of the national government, huge foreign reserves of almost $85 billion against total long-term liabilities of $35 billion, and a low inflation that gives room for accelerated public and private spending. Growth will thus rely on domestic demand and consumption. Meanwhile, these are turbulent times for financial markets. The Philippines and other emerging economies just need to brace themselves for a very rough ride ahead.
(The Philippine Star) | Updated June 18, 2013 - 12:00am
The Bureau of Internal Revenue (BIR) has issued Revenue Regulations No. 6-2013 (RR 6-2013), amending certain provisions of Revenue Regulations No. 6-2008 (RR 6-2008 ) entitled “Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets.”
Specifically, the new regulation, published last April 22, 2013, amended the definition of fair market value (FMV) of the shares of stock being sold where the shares are not traded through a local stock exchange. The definition is critical in view of the possible imposition of the donor’s tax on top of the capital gains tax (CGT). Under the Tax Code, in case of sale of shares of stock not traded in the local stock exchange, the net capital gains will be subject to a CGT of five percent on the first P100,000 and 10 percent on the amounts in excess of P100,000. However, in the event the selling price is less than the FMV of the shares of stock, the seller is deemed to have received a gift. The excess of the FMV over the selling price will be considered as taxable gift subject to donor’s tax. Hence, it is common for taxpayers selling shares of stock not traded through the local stock exchange to use the FMV as the selling price to avoid the donor’s tax.
However, with RR 6-2013, the question now is how to determine FMV. Under the old regulations (RR 6-2008 ), the FMV of shares of stock not traded in the local stock exchange would be the book value of the shares as shown in the audited financial statements (AFS) nearest to the date of sale. On the other hand, according to RR 6-2013, the value of the shares of stock at the time of the sale would be the FMV. In determining the value of the shares, RR 6-2013 prescribes a valuation procedure that changes the stated values of a company’s assets and liabilities to reflect its current fair market values. RR 6-2013 states that the Adjusted Net Asset should be used whereby all assets and liabilities are adjusted to FMV. The difference between the total FMV of the adjusted assets and the total FMV of the adjusted liabilities is the indicative value of the equity (what the business is considered to be worth).
In the event the assets of the corporation consist of real property, the appraised value at the time of sale should be the higher of – FMV as determined by the commissioner of Internal Revenue, or FMV as shown in the schedule of values fixed by the provincial and city assessors, or FMV as determined by an independent appraiser.
With the new definition of FMV in place, it is expected that higher taxes would be collected on the sale of shares of stock not traded in the local stock exchange.
But this situation is not that simple because the determination of FMV under RR 6-2013 raises a lot of questions with respect to sufficiency and timing of documents to establish FMV. When a taxpayer sells shares of stock not traded in the local stock exchange, he needs to get a Certificate Authorizing Registration (CAR) from the proper BIR office. The CAR is required to have the sale recorded in the company’s Stock and Transfer Book.
To get the CAR, the taxpayer would have to submit to the BIR documentary requirements such as the Deed of Absolute Sale, latest AFS, and the CGT and Documentary Stamp Tax Returns. Based on RR 6-2013, it appears that he would also need to present the Tax Declaration, Zonal Valuation and independent appraiser’s report covering the real property owned by the company to establish FMV. In this respect, in the absence of the independent appraiser’s report, would the Tax Declaration and the Zonal Valuation of the real property be sufficient to establish FMV? If the independent appraiser’s report is a requirement, who would shoulder the costs which are most likely not cheap? It could be that this requirement imposes additional burden to the selling stockholder to pay for the report. With respect to personal property, RR 6-2013is not clear if the AFS of the company is sufficient to establish its FMV.
As to the timing of the document, would the documents needed to establish the FMV be as of the time of sale?
What could add to the confusion is that there seems to be a view within the BIR that the valuation under RR 6-2013 applies only to certain properties.
To answer these questions, the BIR may have to issue clarifications; otherwise, RR 6-2013 may impede sales transactions that could impact on the financial viability of the company. When fresh capital is required by the company, and the solution is for an existing shareholder to sell to a new investor, a problem could arise if the BIR cannot agree on the valuation of the company’s shares in view of the valuation issues caused by the implementation of RR 6-2013. One could say then that redefining matters is creating gray areas.
Glenn Raymond O. Paradela is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.
Last edited by Sam Miguel; 06-18-2013 at 10:38 AM.
Reason: Added Annotation
PSEi already down by 19% from peak recorded in May
By Doris C. Dumlao, Paolo G. Montecillo
Philippine Daily Inquirer
9:25 pm | Monday, June 24th, 2013
Prospects of rising US interest rates and a slowing Chinese economy on Monday dragged the local stock market barometer below the 6,000 mark, bringing the local bourse on the brink of returning to a “bear” market.
The main-share Philippine Stock Exchange index (PSEi) slumped 211.12 points or 3.41 percent to close at 5,971.05. The index has pulled back by about 19 percent since hitting the peak of the recent bull run at 7,400 in mid-May.
A market is technically deemed having reversed from a “bull” to a “bear” market when it has retreated by 20 percent from the peak.
As global funds continued to exit emerging markets, the peso also closed weaker against the dollar Monday. The greenback continued to gain strength following signals that the American economic recovery is gaining traction, prompting the US Federal Reserve to signal that it would soon end its aggressive bond-buyback activities.
At the local stock market, all counters were in the red, led by the financial (-4.69 percent) and mining/oil (-4 percent) counters.
With the PSEi breaking down the 6,000 support, this puts the 5,500-5,800 levels at risk, according to Banco de Oro Unibank chief strategist Jonathan Ravelas.
“We’re just correcting excesses that we saw,” said Jose Vistan, head of research at AB Capital Securities.
Vistan said he believed the PSEi would be able to establish a base at around 5,600 to 5,700 at which local valuations would go down in line with comparable markets in the region at around 15x price to earnings (P/E). When the index hit a peak of 7,400, this represented a P/E ratio of about 22x, which meant that the market paid 22 times the amount of money they expected to make in this market.
“If you look at underlying fundamentals and we remove (excess liquidity from) QE (quantitative easing of the US Fed), we’re not fundamentally bearish. We may turn bearish technically, but we’re far from bearish fundamentally,” Vistan said. “This is just a consequence of having overdone it. The run-up to 7,400 was overdone as we moved ahead of fundamentals.”
The PSE said the recent selldown was a result of an “overreaction” to global developments. “There is a disconnect between good local economic fundamentals and the short-term market psychology. The explanation that investors were reallocating back to developed markets is not exactly accurate, with real movements going from the equities market into cash in a period of high volatility,” PSE president Hans Sicat said.
“Looking at the bigger picture, the recent index setback is not equivalent to degrading the strong fundamentals. We believe our listed companies will remain resilient and will continue to find ways to take advantage of the favorable local macroeconomic environment,” he added.
The PSE reported Monday that cumulative earnings of listed firms surged 23.3 percent year-on-year in the first quarter to P163.42 billion on the back of an average revenue growth of 15.4 percent to P1.21 trillion.
“The phenomenal income performance of listed companies has been the main driver of the stock market’s growth this year while also providing a firm basis for investor optimism on the prospects for listed companies moving forward. More importantly, we believe that expansion of this magnitude should have contributed in a big way to the impressive growth rate of the economy so far this year,” Sicat said.
Value turnover amounted to P8.56 billion. There were 165 decliners that overwhelmed 17 advancers while 34 stocks were unchanged.
The day’s biggest index decliner was MWC (-11 percent). The company’s bid to enter the Indonesian market is at risk due to signals from the leaders of Jakarta to instead nationalize the capital’s water concessions.
Other big index decliners for the day were Bloomberry and MPI, which fell more than 8 percent while Belle lost 7 percent. Megaworld, Metrobank and Philex all slid by 6 percent while AGI, Jollibee, Belle and AC faltered by more than 5 percent.
Meanwhile, the local currency looked ready for another week of losses after it retested the 44-to-a-dollar level Monday. The peso lost 2.13 percent last week.
The currency traded as low as 43.95 to $1 before closing at 43.84 Monday, lower than the 43.72:$1 close last Friday. The peso opened the day at 43.85 and was at its strongest at 43.61 to $1. Trading volume was flat at $1.08 billion, just slightly ahead of last Friday’s level.
Filipinos as money ‘experts’: Clueless on bonds, stocks, loans
By Doris C. Dumlao
Philippine Daily Inquirer
4:47 am | Friday, June 28th, 2013
MANILA, Philippines—One out of every five Filipinos from the middle to upper income groups claims to be an “expert” in money matters. But a global insurance giant recently found that members of these classes perform poorly in a basic financial literacy quiz.
Sun Life of Canada’s latest annual study of lifestyles, attitudes and relationships (Solar) showed that Filipinos were typically confident about how they manage their finances, with 20 percent considering themselves an “expert” and sometimes even a “specialist.”
However, test scores from the financial literacy quiz given to a group of respondents showed that only 8 percent got a score of more than 80 percent.
The median score was 50 percent, nowhere near the “passing” mark.
Nobody among the respondents scored more than 90 percent, said the research report that Mylene Lopa, Sun Life Financial Philippines chief marketing officer, presented to the media on Thursday.
The study was based on a sample of 1,100 respondents from the Classes A, B and C across the country with a monthly household income of P30,000 and above.
The respondents were between 23 and 55 years of age and were interviewed face to face in the first quarter of the year.
A 16-question financial literacy quiz was introduced this year to measure the level of awareness and knowledge of basic financial concepts and products, and the capacity to apply such concepts.
The wide gap between Filipinos’ self-perception and actual financial literacy level is cited by Sun Life as the paradox of financial literacy.
When respondents were asked how they defined financial security, the top answer was “having enough bank savings.” Eight out of 10 Filipinos were relying on bank savings, overlooking other options such as life insurance and investments, the research report said.
“Putting one’s savings in a bank account remains prevalent and such an approach reveals how Filipinos prepare or underprepare for tomorrow. One’s money is intact in a bank account but with so little growth, or even negative real growth, there is doubt if it can ensure one’s financial security,” the report said.
Since the Solar study was launched five years ago, it has been an “eye-opener” for Sun Life on designing its financial literacy program, said Sun Life Financial Philippines president Riza Mantaring at a briefing that presented 2013 results.
“The report showed us many interesting insights. For instance, Filipinos seem confident in their knowledge of money matters but in fact, lack knowledge of basic financial concepts and how to properly prepare for their future needs. These findings strengthened Sun Life’s resolve to continue, expand and enhance its financial literacy campaign,” Mantaring said.
The study found that Filipinos were an optimistic people. Asked how they expected their financial situation to change in the next three to five years, 87 percent expressed a positive outlook.
The report said this optimistic outlook was a probable outcome of the robust macroeconomic backdrop. “The Philippines is moving up, at a time when other countries are reeling from weak economies, political backlash and widespread unemployment,” it said.
While the study revealed a lack of knowledge of some financial concepts, Mantaring said it did indicate an improving attitude toward life insurance. “Life insurance is now considered by a third of the respondents a priority purchase for the next two years,” she said.
Asked about their priorities in the next two years, the respondents gave the following answers: opening a business (51 percent); purchasing a parcel of land (45 percent); and getting life insurance (39 percent).
Other priorities were an education plan (39 percent), a car/vehicle (37 percent), gadgets (37 percent), health insurance (37 percent), house/condominium (37 percent), house renovation (35 percent) and durables/appliances (27 percent).
While 80 percent prepared for the future by putting savings in a bank, 30 percent were planning to put up a business. Only 20 percent were planning to get a life insurance and 10 percent were planning to invest.
“Filipinos must be encouraged to learn the basics of proper financial planning and explore a wider array of financial instruments to help them achieve their goals and aspirations,” the research said.
In the quiz, Filipinos were mostly knowledgeable about topics relating to investment, annual interest rate, credit card, asset, life insurance, real estate, debt, savings accounts and current account. A majority answered questions on these topics correctly.
They typically scored poorly in questions relating to preneed plans, stocks, loans, mutual funds, inflation, a healthy budget and bonds.
Multiple choices were given for each question.
The Quiz included questions such as the following:
1. Which of the following statements about inflation is false ?
a. Higher inflation means higher prices of consumer goods
b. Purchasing power is lower if inflation is high
c. As inflation rises, every peso will buy a fewer amount of goods.
d. None of the above
e. All of the above
2. The formula for a healthy budget should be …
a. Expense + income = Savings
b. Income – savings = Expenses
c. Income – expenses = Savings
d. None of the above
3. If a savings account has an annual interest rate of 2 percent, how much will a P100,000 deposit earn after a year?
4. Which of the following can be considered an asset?
c. Utility bills
d. All of the above
e. None of the above
5. Which of the following can be considered a debt?
c. Real estate
d. All of the above
e. None of the above
6. Which of the following can be considered an investment?
Question: The market has fallen again after a short recovery last week. It seems like this will continue for some time because there is not much buying activities in the market lately. I have some extra cash to invest and I don’t know if I should wait for the market to fall further or to buy now. Can you advise me?—Ruby Suan by e-mail
Answer: There is nothing wrong about being positive that the market will recover soon, but you also have to recognize that the general trend may have already reversed from bullish to bearish. The market has entered the bear territory after the index has fallen by over 20 percent from the record high of 7,403 to the recent low of 5,678.
I mentioned in a previous column published last January that a bull market would normally last for three to four years, and this year could be the end of the bull run since this would be the fourth year. True enough, the market peaked last May and the trend has reversed. It may take some time, probably several months, before the market starts to pick up again.
Some people who apparently are still in denial call the current downtrend a correction when in fact it is the other way around. When the general trend is downward, any market rally is considered a correction. It is temporary and short. Once the market has recovered, the downtrend continues. This is exactly what is happening now in the market.
Why has our market turned bearish despite the good fundamentals? Improving economic outlook in the United States and prospects of higher fixed income yields have attracted foreign investors to pull out of our market and send their funds back home. Without strong buying support, the market becomes highly vulnerable to selling pressure.
In the absence of massive selling, the market may move sideways on a downward bias until another set of negative developments trigger a fresh round of heavy selling. Current downtrend should initially hold the market at the 6,100 area but should eventually test the previous low of 5,678. Once this is broken, it will be anybody’s guess. Hopefully, the market will be range-bound at these levels and consolidate.
The prospect of a falling market should not discourage you from investing. In fact, this is the best time to buy stocks. This is the season to bargain-hunt for stocks that offer good value. If your allocated investable fund for stocks is limited, you should rejoice when stock prices fall because you can buy more shares.
In a falling market like this, always prioritize the blue chips because they will be the first to get back fast when the market recovers. Normally, blue chips are reputable stocks that belong to the PSE index, but beware that not all stocks there are really blue chips. Choose your stocks carefully. Ideally, they must have reliable earnings track record, good management team and healthy financial cash flows.
If you want to play defensive, buy stocks that offer high dividend yields. As share prices fall, dividend yield rises. Not all listed companies in the stock market can afford to pay dividends. Buy stocks that have good dividend pay-out history. You may want to target dividend yield by buying stocks at a particular price range.
A good example here is Meralco. This stock pays cash dividends at least twice a year. In 2011, it paid total cash dividends of P7.80 a share. Last year, it paid slightly higher cash dividends of P8.10 a share. This year, it already paid cash dividends of P6.10 for the first half alone and is expected to pay another one before the end of the year.
Let’s say Meralco will pay the same cash dividends as last year at P8.10, although it is highly possible that it will pay higher dividends given its expected 22 percent earnings growth this year, the dividend yield of the stock at current price is about 2.5 percent per annum. This yield is much better than putting your money in the bank or SDA that earns minimal return of less than 1.5 percent a year.
When the market falls further, this stock may probably fall below P300 soon. Let’s say you pick this up at its recent low of P288, you would get a dividend yield of 2.8 percent, which is not bad at all as a guaranteed cash flow in this low interest rate environment, not to mention that the stock will appreciate eventually given its cheap valuation.
Other stocks that you can watch out for that offer potential high dividends are Aboitiz Equity Ventures (3.2 percent), Aboitiz Power (5.2 percent), Globe Telecom (4.4 percent) and PLDT (4.3 percent). These dividend yields are based on current share prices and can potentially go higher if stock prices fall.
There are other stocks that can be good candidates for investment, but make sure that they have at least three years of dividend payment record. Spend time to research the company you want to buy. What is the dividend policy of the company? How often does the company distribute cash dividends in a year? Have they increased cash dividends over the years? How stable is the company’s earnings to support annual cash dividends?
This may be a good time for you to build your stock portfolio. Start to build your core holdings with blue chips that have high dividend yields. Accumulate stocks at targeted price range. Use a chart to guide you at the prices you can buy the stock. Celebrate when the stock prices fall. The lower the share price, the better opportunity for you.
Stocks get fresh boost from rosier IMF outlook on PH
Philippine Daily Inquirer
10:57 pm | Thursday, July 11th, 2013
Local stocks on Thursday received a fresh boost from the International Monetary Fund’s decision to upgrade its economic growth outlook on the country, and the US Federal Reserve chair’s announcement that the United States needs to sustain its monetary stimulus.
The main-share Philippine Stock Exchange index jumped by 99.18 points, or 1.57 percent, to close at 6,407.36.
All counters closed up, but the biggest gainers were the industrial and property counters, which both rose by over 2 percent.
Value turnover improved to P7.15 billion from that of the previous day.
There were 106 advancers against 40 decliners, while 43 stocks were unchanged.
Risk appetite on local equities improved after IMF upgraded anew its growth forecast on the Philippines to 7 percent, from 6 percent. But the institution took a dimmer view of the global economy and even downgraded other emerging markets in the region.
Fed chair Ben Bernanke also had a hand in lifting the local stock market when he said that US regulator would need to continue its stimulus program because of the low inflation and high unemployment in the United States.
The day’s top index performer was Petron (+7.01 percent), followed by Bloomberry (+5.82 percent). FGEN, ALI and DMCI were all up by over 4 percent while Philex, AC, URC and Megaworld gained over 3 percent.
MWC, battered by concerns on consumer complaints against pass-on charges, rebounded by 2.73 percent. Doris C. Dumlao