Managing an equity portfolio amid the crisis

It began with the meltdown of the US housing market. 

Years of unprecedented debt growth, which pushed up asset prices higher than their economic value, created the credit crisis we are in today. Wall Street was leveraging their securities as high as 30 to one, while Main Street was accumulating more debt as the value of its various assets was increasing. Inevitably, home prices started to decline and homeowners experienced their lines of credit reduced, if not cut off. Homeowners were unable to make their mortgage payments, prompting a surge in housing foreclosures. As a result, financial institutions holding mortgage-backed securities became at risk of defaulting. At the height of the credit crisis, financial institutions were so cash-strapped that they were unable to provide short-term loans to each other, which aggravated the already serious liquidity problem.

Governments then decided to cut interest rates to pump-prime the economy. A consolidated measure was made by the US Federal Reserve and Treasury to inject capital into distressed banks, hoping to jumpstart lending. However, as the flight to cash continued, financial institutions were still extremely wary whether they should start lending again.

The next stage is how the different markets will react to Barack Obama taking the helm as commander-in-chief and what policies he plans to put forward to address the economic crisis facing the US today.

So far, markets have already accepted that it will take time to resolve the issues. While it is obvious that the Philippines is not exempt from the global financial debacle, opportunities are still present in local equities. Valuations were ignored during the recent sell-off, and fund managers are already aware of downscaled earnings expectations for 2009.

Caving in to the turmoil by holding cash is a natural reaction. However, as seasoned players would put it, markets will always find an inflection to correct itself because when anxieties diminish, it’s time for logic to set in. Eventually, the expected return from equities should regain attention. While tougher times have prompted fund managers to take on a more conservative approach, there are also believers who see that bargain opportunities strike only once.

Investors should start evaluating the market for beaten-down stocks showing solid balance sheet and stable cash flow. While we continue to emphasize caution and prudence in buying decisions, we suggest that investors may start slowly accumulating these shares. Employing a similar strategy would allow investors to average cost, and still be cautious about when to enter given the extremely volatile nature of the market today. It should also be noted that lowering of corporate taxes next year (from 35 percent to 30 percent) will be welcomed by companies showing stable earnings.

Having a balanced portfolio is a must in this difficult environment. Check your portfolio if it is still in line with targets, and “realign” accordingly. We recommend placing more weight in more defensive and dividend-yielding stocks, and less weight on issues that are speculative and illiquid. It is never too late to reposition your portfolio so that you come out ahead in the end.

The author is the vice president of 2TradeAsia.com and director of F. Yap Securities Inc. For comments or queries, e-mail at [email protected].