PIFAAP Aug 6, 2010 Quarterly Special Interest Session

“Tracking the Markets”

Resource Speaker: Mr. Henry Herrera

According to Henry, the changing financial and economic landscape has

impacted the role of life insurance agents. No longer just selling traditional
insurance products for protection, life insurance agents have evolved to become
Personal Financial Planners and Financial Advisors. This development has been
spurred with the introduction of variable insurance products or VUL.

Investment linked insurance products now give the life insurance industry
the opportunity to grow and accelerate at a much faster and bigger pace. Henry
cited that the combined assets of all the life insurance companies do not even
equal the assets of the 7th largest bank in the Philippines. The amount of
deposits in the various banks total more than P3Trillion and it is this amount
which the insurance industry should set its sight on.

Key Economic Indicators

In 2009, only Poland and the Philippines posted positive GDP growth.
The US and all other EU economies contracted in 2009. Economic growth in the
Philippines generally outstripped Euroland’s Big 15 and the US during the last 5
years. Henry gave an important observation – the Philippines is on a different
cycle from the US.

Philippine media has the tendency to dwell on the negative and was
particularly biased against the GMA administration. Henry noted that what media
says is not necessarily what is actually happening on the ground. Contrast this
to Bloomberg which highlights positive news and developments.

Citing some relevant 2009 statistics:

• RP deficit 3.9% of GDP
• RP debt 58.7% of GDP
These figures are better than:
• US deficit 12.3% of GDP
• US debt 98.1% of GDP
RP figures better than one of Euroland’s Big 15:
• Germany deficit 3.5% of GDP
• Germany debt 73.1% of GDP

Henry cited the BPO industry which will generate a lot of jobs for
Filipinos.(Contrast this to the US which has lost 8,000,000 jobs over the last 2
years.) It is in our nature and our culture to be service-oriented. This trait is an
advantage and a major reason for the BPO expansion in the country. On the
otherhand, the Philippines does not attract capital-intensive manufacturing
business largely due to unstable and unpredictable government direction which
changes with the change of presidents.

Public Debt as % of GDP (Gross Financial Liabilities)

Sourced by Henry from the website of OECD, the % of nominal GDP

projected for 2011:
• Japan with 200% debt ratio; followed by Greece and Italy
• US, France, UK and Portugal have debt ratios equalling their GDP

For unemployment rates, it seems that 10% is the threshold, beyond

which red flags are raised.
• Greece, Ireland, Portugal and Spain (PIGS) all have unemployment rates
of 10% or more.
• Compare this to the Philippines which had an unemployment rate of 7.3%
in 2009 and has been on a downward trend since 2000 when it was 11%.

Summary on Fiscal Deficit and Sovereign Debt

The Philippine fiscal deficit in 2009 stood at only 3.9% of GDP – among
the lowest. The Philippine debt ratio of 58.7% of GDP in 2009 – also among the
lowest.

The US with its massive bail-outs and massive stimulus, posted a fiscal
deficit of 12% of GDP. The US debt ratio stood at 98% of GDP in 2009.
 Fiscal deficits among EU countries ranged from 11% to 13% of GDP last
year, except Poland.

With the new administration of President Benigno Aquino Jr, there is a

possibility that the Philippines may be given a ratings upgrade. Henry mentioned
this to highlight its effect on interest rates. Movements of interest rates have an
opposite effect on the stock market.

To illustrate, the credit rating of the 10 year bond of Greece was

downgraded from investment grade to junk. This downgrade caused a spike in
the interest rate from 4.4% in Oct 2009 to 12.4% in May 2010. Inversely, the
Greece Equity Index dropped 50% from Oct 2009 to June 2010.

Equity Valuation

Henry noted that PER of 18x in the US stock market given its conditions
seems to be unreasonable. It is Henry’s view that this may go down to 9x. We
were shown a graph that tracked the US and Japanese stock market in the last
19 years, given certain parameters. It appears that the US stock market is
practically tracking the Japanese market in the last 19 years. Japan stock
market down 50% from 2010, moving forward.

In another chart, Henry pointed out that despite 2009 being a recession
year, all equity indices were up. This was pointed out to highlight the difference
between market cycles and economic cycles. Markets are always forward
looking and anticipate/discount future events. It is ahead of the curve, compared
to economic cycles. The growth of the economy over the long term determines
how markets will perform.

In the local stock market, the current PER of 10.6x is near historic lows
and presents a buying opportunity. Henry shared his own rule –
GDP x 2.5 = growth in listed firms over the long term

The Phil. Gov’t. debt has generally been on a declining trend and much of
this is due to the EVAT. And, consider that the high ratings of our new president
will likely have a long-term impact on the level of investment, including foreign
direct investment.

The down cycle of interest rates just started. According to Henry, this may
last for the next 10 to 15 years. Inflation has also remained generally low. It is
helpful to note that 90% of our GDP is consumption. Local consumption is
largely fuelled by OFW remittance.

The PSEi doubled when foreign buying came in 2005. Up to Jan 2009,
the local equity market was generally dictated by foreign investors. Since then
however, the local equity market has been sustained largely by local investors.
Based on 1st quarter report, the net earnings of listed firms was reported at
113%, more than double. With an average growth of 5% over the last 12 years,
the equity market has more upside potential as interest rates remain low.

Henry is cautiously optimistic of the equity market but cites the following
key threats:
• Fiscal slippage
• Double dip global recession
• Significant market downturn
• Commodity price spikes
• Impact of major calamity

Note: Before the start of the afternoon session, Henry stated that the
presentation is based on his own research (with sources acknowledged) and
opinions expressed are his and his alone. It does not represent the view/s of any
organization he is connected with.

Plaque of Appreciation presented to Henry Herrera after his talk last Aug 6, 2010
at the IIAP. PIFAAP Trustees include (from left) Joseph Janer, Joy Flores,
Esphie Chong (Immediate Past Chair), Patti Sardalla, Nenette Alano (PIFAAP
Chair), Sheila Dinoso and Boojie Lucila.