IFE Management 2023 Investment Outlook: Should you invest in bonds, stocks or property?

Each new year comes with a slew of new things: opportunities, changes, challenges.

This year, despite the situation improving compared to the past three years when pandemic restrictions were at their tightest, there are still a lot of uncertainties and anxieties, especially when it comes to one’s personal finances and the economy as a whole.

To address some of the burning questions when it comes to investing and everything else in between, IFE Management conducted an investment briefing last month at the Discovery Suites Manila.

The event gave investors a 2023 investment outlook as well as some real estate insights to enhance financial freedom, especially among millennials.

The year that was

The first speaker, Enrique Fausto, IFE’s chief financial architect, discussed the real and current state of the markets.

Fausto described 2022 as a “crazy” year with more than its fair share of headlines which adversely impacted the markets: the 40-year high inflation at 9.1 percent in the US which drove gas prices up, the Russia-Ukraine war causing fuel and food prices to soar, central banks increasing interest rates, and COVID-19 lockdowns in China.

In response to the ballooning inflation, central banks raised interest rates. The Bangko Sentral ng Pilipinas (BSP), for one, had interest rates at two percent in early 2022, but jacked it up to as much as 5.5 percent later in the year. Fausto mentioned that this has a domino effect: higher interest rates impact banks which then impact ordinary citizens.

“Banks borrow money from the Central Bank all the time. When that rate adjusts, the banks pass it on to us. So for everyone here who’s trying to buy things like property, cars, when it’s time to reprise your loan, you’re going to realize that they (banks) are going to make interest rates higher.” This, according to Fausto, hurts both business profits and consumer spending, which ultimately, is bad for the economy.

“Main story: bad year. It was a pretty challenging year even for those who diversify,” he said. Diversification in investments is believed by many to lessen risks, with the formula usually at 60 percent in bonds, 40 percent in stocks.

2023 outlook

Are things finally going to get better? This was the question Fausto aimed to answer. The  chartered financial analyst sees inflation as peaking, but still persistent.

Quoting BSP governor Felipe Medalla, Fausto shared that the most likely scenario is for the March (BSP) meeting to see the last increase in interest rates.

The BS Management Engineering graduate from the Ateneo de Manila University sees a huge chance for the US to go into recession. “If their economy is going down and their stock market might be going down as well, that typically drags everyone else with them. That’s the big thing that everyone’s worried about.”

For Fausto, if the US goes into a deep recession, it’s possible for China to not have a strong growth as well given that they have most of the factories that produce for countries like the US.

Given all these factors, Fausto advises investors:

First, is to invest excess cash in a diversified portfolio. “It’s a good time to invest, and like what I always say, diversify.” Quoting Sir John Templeton, the young entrepreneur said that “the time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

“Where are we right now? I don’t think we’re at maximum pessimism, because that was like during the COVID-19 lockdowns, but it’s still pessimistic. We’re seeing this big recession coming on, but there are reasons to think that it’s not going to be as bad as before.”

He believes that it makes sense to invest, but to invest well by diversifying one’s portfolio in as many classes of assets and geographies as possible, following Ray Dalio’s advice, the founder of Bridgewater Associates, the world’s largest hedge fund.

Second, he argued that one should tilt one’s portfolio to Philippine bonds and stocks. This is because even if inflation in the country is peaking, he sees a slowing down in the coming months. “It’s a good thing for bonds,” he shared. “When the inflation is already up there, interest rates are also probably closest to the peak. If those fall, along with inflation, that makes the bond you bought much more valuable.”

Lastly, is to deal with inflation in the “real world” by paying down debts, cutting down on unnecessary expenses, and adding value to customers and employers.

He reminded business owners to constantly add value to products and services, so that when they raise prices since inflation is still here, people will generally be okay with it because they’re being provided more value anyway. For employees, on the other hand, he advised them to strengthen their skills and widen their network.

Despite his optimism, Fausto cautioned that there will always be risks. He specified the looming US recession, the possibility for inflation to remain high, and how trade and budget deficits can depreciate the Philippine peso.

“There are still risks ahead, it’s not completely blue skies,” he quipped.

Investing in real property in 2023

The second speaker of the event, Edric Maguan, discussed investing in real estate specifically for millennials and how it can lead to financial freedom, or the ability to control one’s life choices without worrying about money.

“The idea is to have enough passive income to cover your daily living expenses. This allows you to focus on more important things in life,” said the certified public accountant who started investing in his early 20’s.

Maguan believes that real estate investing is the key to financial freedom. He also thinks, however, that many people are afraid of this kind of investment because it’s usually in the millions. “Nakaka-intimidate talaga, while others think it’s too complicated.”

The CEO and lead broker of ECM Realty, a real estate brokerage and consulting firm, allayed these fears. “Real estate investing is highly rewarding. There are so many ways to make money out of real estate. It’s also safe, meaning it’s not high risk, high reward. It’s simple, it can be done by anyone even if you don’t have millions to invest right now.”

The certified public accountant explained that in real estate, there are two main wealth drivers: capital appreciation and cash flow. In terms of capital appreciation or the current value of a property versus the purchase price, Maguan said that residential real estate values in the Philippines are already above pre-pandemic prices. “The market was very, very quick to bounce back,” he said.

Giving one of his own investments as an example, Maguan said that a two-bedroom condo unit with a parking slot he bought in late 2016 for P4.3 million is now worth P7 million. That’s a capital appreciation of P2.7 million.

“Aside from this appreciation you see over time, which is called natural appreciation, there are also strategies you can employ to instantly increase capital appreciation or what we call forced appreciation.” He gave as examples improving or furnishing the property and buying below the market value.

Real estate is likewise a possible source of cash flow, the profit you get from rent less property expenses. It’s also called passive income because rent comes in without one having to get so actively involved.

If you’re worried that you don’t have millions in savings yet, Maguan said that there are ways to invest in real estate without having to shell out a large sum of money. “The answer lies in the power of leverage or using other people’s money to generate financial benefits.”

“For the down payment, you can use the developer’s money when you buy pre-selling properties,” he said.

“For the remaining balance, you can use the bank’s money when you get a home loan. Using both, you can invest in a property without shelling out a huge sum of money at any given point.”

He suggested allocating at least 30 percent of your monthly income for the monthly down payments: “Certainly you can allocate more if you have the capacity to do so. Just to give you an idea, a safe amount to start with when investing in pre-selling properties is P20,000 a month. With this, you can buy a studio-type or a one-bedroom condo unit in a good location in Metro Manila.”

Maguan summed up his talk with the reminder that investing in real estate is always a good idea. Its prices are stable and growing and most of its risks are controllable as long as one has a mastery of one’s personal finances.

“Whatever your goal or your situation, there’s always a way to make millions in real estate,” he added.