Security Bank

ASSET MANAGEMENT GROUP

Everybody Ought to be Rich

The Case for Equities in Your Portfolio

Date: November 18, 2016

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Agenda

Why Invest in the Stock Market?

Its All About Fundamentals

Delving into Technical Analysis

Why Retirement Funds Benefit from Equity Investments

Key Takeaways

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Why Invest in the Stock Market?
S&P500 Index

+3,477%

Source: Bloomberg | 2
 Why Invest in the Stock Market?
Apple Wells Fargo

+5,429%
+20,417%

Coca-Cola Berkshire Hathaway

+6,189% +7,185%

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Source: Bloomberg
Why Invest in the Stock Market?
PSEi Index

+1,302%

Source: Bloomberg | 4
 Why Invest in the Stock Market?
Universal Robina DMC

+1,368%
+1,367%

JG Summit Aboitiz Power

+1,128% +672%

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Source: Bloomberg
Why Invest in the Stock Market?

Equity investments allow us to participate in the growth of companies by having a stake.

Majority of the wealth of billionaires emanate from the market capitalization of their stocks.

There is higher risk involved but the potential rewards surely compensates for this.
There is no free lunch.

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 Its All About the Fundamentals Macro Environment

GDP
Growth

Net
Inflation
Exports
Country
X

FX Deficits

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Source: Bloomberg
 Its All About the Fundamentals Macro Environment
Philippine GDP Growth (%) Philippine Inflation
9 10
8 9
7 8
6 7
6
5
5
4
4
3
3
2 2
1 1
0 0

Philippine Current Account Balance (%) Philippine Fiscal Deficit as % of GDP

7 0.5
0
6
-0.5
5 -1
4 -1.5
-2
3 -2.5
2 -3
-3.5
1 -4
0 -4.5

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Source: Bloomberg
 Its All About the Fundamentals Macro Environment
Philippine Exports vs Imports Growth (%) YoY OFW Remittance Growth (%)
50 30
40
30 25
20 20
10
0 15
-10
-20 10
-30
-40 5
-50 0
-5

Exports Imports

WTI Oil Prices (%) USD/PHP Exchange Rate

140 50
49
120 48
100 47
46
80 45
44
60 43
40 42
41
20 40

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Source: Bloomberg
 Its All About the Fundamentals Macro Environment
US 10 Year Bond Yield PH-US 10 Year Bond Spread
5 6
4.5
4
3.5
5
3
2.5
2
1.5 4
1

3
PH 10 Year PDSTF-R2 Yield
10
9
2
8
7
6
5
4 1
3
2
1
0 0

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Source: Bloomberg
Its All About the Fundamentals Company Specific

Company X

Strong Business
Model given Macro
Environment

Return on Equity Earnings Growth Leverage Free Cash Flow

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 Its All About the Fundamentals Company Specific

JFC

Leading Fast Food

Chain in a consumer
driven country

Return on Equity Earnings Growth Gross Margins Leverage Free Cash Flow
16.6% 11% past 4 years 17.81% < 1 LTD/E PHP 9.8 billion

JFC has risen 150% the past 4 years and is one of

the most expensive stocks in the PSEi at 40x 2016
P/E

Stability of earnings and the strong business

model has attracted investors both local and
foreign to the name

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Source: Bloomberg
History Repeats Itself Delving into Technical Analysis

Forecasting future price direction by using past

movements

History repeats itself because people dont change

Main tool is the price chart of securities

A number of tools have been derived from the behaviour of

prices

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 History Repeats Itself Delving into Technical Analysis
The Trend is Your FriendUntil Proven Otherwise

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Source: Bloomberg
 History Repeats Itself Delving into Technical Analysis
Identifying Buying/Selling Levels Support/Resistance

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Source: Bloomberg
 History Repeats Itself Delving into Technical Analysis
Identifying the strength of the trend Moving Averages

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Source: Bloomberg
 History Repeats Itself Delving into Technical Analysis
Momentum Indicators Relative Strength Index (RSI) / Moving Average Convergence Divergence (MACD)

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Source: Bloomberg
 Why Retirement Funds Benefit from Equity Investments?
Global Pension Assets Study

P7 44% 29% 24% 3%

US 47% 23% 27% 2%

UK 43% 37% 18% 3%

Switzerland 29% 35% 29% 7%

Netherlands 33% 52% 15% 0%

Japan 31% 57% 9% 3%

Canada 39% 31% 27% 2%

Australia 48% 14% 21% 17%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Equity Bonds Other Cash

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Source: Willis Towers Watson Global Pension Assets Study 2016
 Why Retirement Funds Benefit from Equity Investments?
10 Year US Treasury 10 Year German Bund

Conventional finance would say that bond yields cannot go negative, but Japan and Germany 10
year have gone beyond the zero line. This poses a problem if inflation and the interest rate on
liabilities are positive.

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Source: Bloomberg
 Why Retirement Funds Benefit from Equity Investments?
PH 10 Year PDSTF-R2 Yield Philippine Inflation
10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0

As it stands, real return on Philippine 10 year yields are almost zero in this new normal.

Equity investments, which derive their value from growing companies, potentially serves as an
inflation hedge. Some more mature companies also provide ample dividend yield which further
augments the total return.

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Source: Bloomberg
Key Takeaways

New normal pushes us outside our comfort zone

Equities are riskier but potentially offers higher returns

Tilting the risk in our favour demands doing our HW

Successful equity investing will demand long term thinking

Things dont go up in a straight line. Higher volatility investments demands

mental fortitude

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