The global and Philippine investing landscape is shifting. The principles of investing that we know to be true before may not hold water now in todays economy. We have see how COVID has been causing drastic changes not just on how we view investments but as well as several political uncertainties that may cause drastic effects on our investments.
It seems to me that there will be four major industries that will thrive post pandemic:
3. Sanitary Companies
4. Basic NecessitiesIf you look at most investments nowadays, you will see that investments in tech companies are the ones that are doing well or at least not doing a negative performance since January 1, 2020.Take for example the funds of Insular Life. In the illustration here you will see that all the other equity funds are doing negative but only Insular Life’s Global Technology fund is doing positive.DOLLAR TO PESO EXCHANGE RATEMost of you may have already read this new article: https://www.bworldonline.com/
Recently The Economist Magazine created a video that China is already back at 90% of their economy. See video here.
From the video above, it seems that US will have a hard time keeping up with China as it has already opened 90% of it’s economy while the US is still in shambles.
With this, I see a decline in the US dollar exchange rate further as power shifts from West to East.
You can see that the US has an increasing Debt versus GDP ratio which means that the US is continually getting more debt than it’s GDP at 106%
Meaning China if it wants to, has room to further stimulate it’s economy by incurring more debt. The US on the other hand has a lot of debt already in its plate.
This escalates further as in the US, more and money are coming out from their country as indicate in this Current Account to GDP Chart:
If you look at the Chart above, you will see that the US has more money coming out of their country than money coming in to their country which is bad for any economy.
Versus China, more is coming in than coming out:
Macau on has Current Account vs GDP ratio at a high of 43%:
The pattern then seems to be consistent. The more a country has money going out of their country than going in will eventually result to a bad future for such country as seen in the illustrations above.
Money comes out of the country when:
2. People import items from other other countries
Money goes to the country when:
2. People export items to other countries
This is where a government needs to focus more if it wants to improve their economic future for financial, political and military influence.
They say that today’s war is no longer military but economic. Thus, the country who can send more money coming to their country than more money coming out of their country will be the winner. This is because countries who suck in more money to their country will have more funds and thus will be able to build more military power such as aircraft carriers, nuclear weapons and more.
That is why creating more young Filipino entrepreneurs who will not only sell to people in the Philippines but also to people outside of the Philippines are more important now more than ever. These Filipinos entrepreneurs who bring in money from other countries are actually heroes as they are able to get money from other nations and increase our Gross National Product.
In reality, Gross National Product is more important than Gross Domestic Product. GDP measures money coming in from companies in the Philippines (whether foreign owned or Filipino owned). The GNP on the other hand measures money coming in from Filipinos and is a good measure of the amount of tax that we expect to collect because it includes income from companies of Filipinos abroad. Income of foreign companies who cater to Filipinos are not usually taxed especially digital companies but they can comprise our GDP. Whereas Filipino companies even if they are outside of the Philippines, pay taxes to the Filipino government making GNP more important to monitor than GDP.
Take a look at US for example, they have more money coming out than coming in. They would never be able to outmatch China in the short term as more Chinese companies are getting the monies of people. Even in the Philippines you see Lazada and Shopee and Grab, which are companies that are getting money from Filipinos but are not taxed and thus is not contributing to the funds of the government. Whereas the money that these companies get will be taxed in their home country making their country stronger and more powerful.
In truth, I see that the US might be headed for a downturn. Another reason is its demographic structure or its population. Basically if you look at structure of the US vs China, we see that the US has a population who are not anymore as hardworking as their forefathers. While China’s population is more hardworking, techy, intelligent and entrepreneurial than other countries.
It seems to me that the US is still able to maintain it’s economic and political influence because it controls the printing of the dollar. And anytime it needs money to fund government expenditure, it will just print the dollar and it is accepted all over the world. This printing is quite alarming as it does not bring true trade and commerce in the US. That is why you have seen China also creating their own Cryptocurrency as in this link: https://www.bloomberg.
I bet that the China is using this to challenge the dollar that is circulating freely. The US dollar is like a piece of paper that is printed which then becomes money out of nothing. Cryptocurrency on the other hand is something that cannot be easily manipulated. Since there are many ledgers or servers in different locations, it would be almost impossible to place data in the server without other servers noticing the discrepancy, making it a very reliable way of storing currency. The public seems to have noticed the tricks of the central bank’s of some countries that are printing money without any form of control from its citizens. When a country prints money it essentially makes the existing money of its citizens cheaper. Just imagine, while other countries borrow money and pay interest from World Bank or ADB to get funding to support their government, some countries like the US just print money and get to save on paying interest. Of course there is a threat to inflation but if the money if not infused in large amounts but infused in trickles, then inflation will be barely noticeable. Further, a lot of money is not actually circulating or being used to purchase commodities because people are afraid during crises. Most of the printed money it is just in the hands of people thus inflation becomes low despite printing.
These are just my opinions though it seems that the downfall of the US was something that was expected when economies started opening up and when the internet came to affect commerce more than ever. Because of the ease of access of labor and other products in other countries magnified by ease in communication and visibility of prices through the internet, people are no longer getting labor and products from the US which is far more expensive than other countries like China. It is normal for people to get these from cheaper countries when you have the internet at your finger tips able to search for cheaper labor and products elsewhere.
Thus, it would be very likely that the US will have to deflate their prices or other countries have to inflate their prices. This is how a free market works, the prices have to meet an equilibrium point. The internet is allowing competition not just within your country but also outside your country. The only way the US can stop this now is through tariffs, more patents, selling more luxury items abroad that surpass rational thought and possibly by more innovations that causes other countries to pay for royalties. It seems to me the country that will be able to patent the first working COVID vaccine will really benefit from more money going to their country. But for now, without these things happening in the US, the future seems gray for them.
Thus, it is very likely that the US dollar in the long run will not be as strong as it will be. Nevertheless, my analysis could still be wrong as these are all opinions. But as I see the US dollar exchange rate vs peso, it seems that it is headed for a downturn. The only thing to stop this will be so political maneuvering by the US which is short term. At the end of the day, the economics, level of commerce, institutions and quality of the people in your country will dictate the future and it seems that the American youth is more YOLO and short term oriented than the Chinese youth were trained to be more business minded and long term oriented.
I may be wrong, but I am convinced in the long term that the US dollar may then continue to weaken and we see power shifting from the West to the East. This not necessarily mean USD versus Philippine peso but USD versus currencies of other stronger economies such as the Chinese yuan. Although, political and institutional interventions may come into play. Deflation and inflation may be seen in the coming years as prices meet the equilibrium. There may be more desire to create a digital currency by nations or for people to buy gold or silver as it is something that is limited in quantity and thus can be a good store of value.
For the Philippines, we see a need for more literacy especially in the purchasing of stocks. We see a need for investors to be more equipped with fundamental analysis as a basis for purchasing stocks although there are hardly few websites in the Philippines that provide reliable fundamental data that is easily digestible by ordinary investors. Without literacy in fundamental analysis by the majority of the population, we will still continue to see the Philippine Stock Market going up and down like a roller coaster because purchase of stocks will be based on emotions and not based on fundamental data and performance of companies.
If you have other thoughts or want to discuss this more feel free to get in touch with me. If you have topic ideas for my next blog let me know as well. I have not been able to properly check the grammar and spelling and you might see some errors so let me know as well.
We also conduct regular financial literacy seminars. Join us by visiting www.seminarph.com
Until the next blog,
Mark Joseph T. Fernandez, CPA, RFC, AFA, AWP, AEP
Head Financial Advisor
FinancePH Financial Advisors
Image Source: iMoney.ph
Graph Sources: Businessworld, Wiki, The Economist, Trading Economics