Q&A with UBS Securities President Robby Go on Marketing Equities

Robby Go is the President and CEO of UBS Securities in the Philippines, a worldwide company headquartered in Switzerland. UBS has consistently been on the top rank of external surveys such as Institutional Investor (ranked 1st in research in 2016) and Asiamoney (ranked 3rd in research) for the equities product. UBS has also consistently been awarded by The Asset as The Best Brokerage House for the Philippines (awarded in 2012-2014 and 2016) and Best Equity House (2012-2014) while Robby Go has been named as one of the Top 3 industry ‘salespersons’ in Asiamoney polls for eight years in a row.

Q1: What is investment in equities? Who are attracted to these?

A: Equities are investments in stocks and are an asset class that provides diversification from safer investments such as corporate bonds and government securities. Equities offer higher returns, but also carries more volatility and risks. As an investor of listed companies, you become a stakeholder of that company — no matter how small your investment is. You basically partake in the returns that company is making, and align yourself with the interest of the major shareholder. Equities as an instrument is meant for someone who has cash savings for investments. Returns provided by the stockmarket are volatile, and this depends on factors such as macroeconomic environment, the global financial markets, politics, and the like.

Q2: When should an investor get into stocks? When should he/she get out?

A: Before investing in equities, one should look at his objectives and other considerations such as timeline, target rate of return, need and use of funds, etc. One should not look at investing in equities to make a return the week after. Oftentimes, those who invest in the stockmarket look for quick returns without gauging the risks. Investing in equities is not a complicated matter, but it would need some level of understanding and appreciation. To begin investing in stocks, it would be wise to read up on macro developments, corporate events, industry issues, and the like. One should also learn to understand how global markets and politics impact markets. In cases when these factors converge such that it could impact returns of listed companies, equities then become a less attractive instrument. Depending on one’s investment objectives, one could increase exposure in equities – or “overweight” equities in their portfolio (Lightening exposure to equities, on the hand, when you go “underweight” equities). And for an average investor, one cannot learn the trick of the “right time” to get in or out: you just have to do it over time.

Q3: How does one know a good stock from a bad stock?

A: For me, there is no such thing as “good stock” or “bad stock”. Companies go through cycles which impact their operations and earnings, making them a good investment or otherwise. Companies then are considered favored or “good” when they are in the right structural cycle, when conditions are conducive such as low interest rates, high demand for their products, etc. Institutional investors generally look for earnings growth and valuation metrics, or the PE ratio. Growth can be driven by sector trends, company strategy, regulations, and the like. Beyond earnings trend, I particularly like companies with good and steady cashflows. Earnings are sometimes depressed by interest expenses (ie when companies have to pay off interest on debt) or by depreciation expenses. However, if the underlying cash generation from operations remains strong, I would consider these companies as good investments. On the other hand, I tend to raise concerns on companies which are undergoing a bad cycle, or are under pressure by regulations such that returns are impacted. Investors should watch for headwinds in the macro environment. For instance, are rates set to rise such that it could impact returns on equities? Other factors that could make a company a riskier investment are sector outlook (ie is the sector under some pressure such taxation, regulatory limits?), market position of a company (ie is the company losing market share or pricing power?), among others. Amidst all these, one should always consider the valuation of a company: Is the market overpaying for the company such that its PE is on the high side, or is there value, ie cheap valuation such that the market is ignoring the potential returns? Those factors are enough to consider a “good investment” or otherwise.

Q4: Should an investor do self service via online channel or hire a stockbroker for advice?

A: That depends on the expertise of each investor. Newbies should look at a qualified and certified salesman for advise, but I always think investors should also learn to invest and decide on their own. Investors should not take the broker’s words at face value without doing their own research. In the olden days, we have this thing called “Dow Theory”. The joke was that investors would pick up a stock because their next-door neighbor said the stock will go up “daw”. Stockbroking is not an easy job. But I think the industry has changed and professionalized significantly in the past few years. A more sophisticated investor, meanwhile, should look at online broking services. Having learned the ropes of investing, an online service is more efficient and transparent. The global industry has already shifted to direct market access trading, and with improving technology and data access, this trend will continue. At the end of the day, an investor should ideally have a stockbroker to provide ideas for investing, and an online service that will be used for execution. However, there are those investors who don’t have time to monitor day-to-day market movements. That’s where the unit trust funds and the professional fund managers come in. These services are provided by banks and insurance companies.

Q5: How do you tell a good stockbroker from a bad stockbroker?

A: In my book, a stockbroker should look at each client relationship as a long-term investment and not as an avenue for a quick buck. While it is true that brokers are driven by commission income, I think the sustainability and longevity of a good stockbroker is having the integrity to his or her client, staying true to their investment objective, and working together with the client towards that objective. Good brokers are those who do their own research, looking at different angles and challenging views out in the street. One should also recognize that brokers are human too. They do make mistakes in their ideas and recommendations. Another mark of a good broker is one who owns up to his mistakes, and comes forward with a remedial action. Lastly, I always consider the character of a person to qualify for a good broker. One should have sincerity and integrity.

Q6: What are potential risks and concerns for equities in the near term?

A: The market has become more volatile since the May presidential elections, with the PCOMP index rallying from about 7000 pre-elections to a high of 8100 pts, over a span of two-three months. Another three months down the road, the index dropped to 6600. So we are talking of a range of 1500 pts for the index. Today, that has recovered back to 7300, so that is another 11% upside from the lows. We see the index to continue its volatility, driven by some near-term concerns: (a) Interest rate movements, inflation rates, and monetary policy. If rates start moving up to reflect US Fed rate hikes, this could impact returns of the market and the attractiveness of equities as an asset class. (b) Earnings outlook for Philippines—which could be impacted by issues such as rising costs, competitive market parameters, margin pressure, etc. We believe that whilst corporates remain healthy in the Philippines, the environment is becoming more challenging. (c) State of macro reforms, and how fast they can be implemented. We are monitoring how the new government’s tax reform and infrastructure reforms, in particular. If they get delayed, investors could become impatient. (d) Politics, locally and globally, could provide risks as policies are altered or prioritized.

Q7: Do you have data which will support that investment in equities has greater return than investing in say preferred shares or real estate?

A: The Philippine composite index or PCOMP has had a volatile run since the global financial crisis in 2007. We have seen returns swing from a 48% decline (2008) to a 61% return (2009). Stripping these extraordinary years, however, the PCOMP’s positive return over six years (from 2009-2014) would have provided greater return, especially as interest rates came off this period to reflect the country’s improving status. Recall that this was the period when the country obtained investment-grade rating, which is reflected in the interest rate and the collapsing cost of money. Notwithstanding that this was the period when the global central banks were printing money (through several rounds of quantitative easing), we saw an unprecedented amount of money flow into emerging markets, including the Philippines. Thus, whilst Philippines was undergoing structural changes, the global financial markets had mobilized and equities became a preferred instrument. This has partly propelled Philippines to post superior returns. But this was not always the case. The past two years, 2015-2016, have seen negative returns for the PCOMP, thus on a year-on-year basis, it could be argued that fixed income would have outperformed equities. Within the PCOMP, however, there are names that would outperform the PCOMP index. So the key to investing in equities is looking for the right company, which could provide more superior returns. That is the challenge vis-à-vis buying into an equity traded fund (ETF), which basically follows the movement of the index.

Q8: Is it right to say that the one who invests in equities should have high risk appetite? Why or why not?

A: Yes, Equities carry a higher risk-return profile. From 2009, the Philippine market has had an amazing run but this turned in negative returns between 2015-2016. A folly is that one will look at the return for the past few years and immediately conclude that equities will continue to provide this kind of returns. As a general rule, equities should provide better returns, but they also undergo more volatile periods. Equity investors should be particular about this, thus with a higher risk appetite, they should either have a longer holding period or a lower exposure to equities. Given the higher risks related to equities market, an aggressive investor will likely increase his level of exposure to equities vis-à-vis other instruments. On the other hand, a more conservative investor should balance out his portfolio, and if they are not familiar with the market movements, should probably start off with a low exposure to equities, say ~10%. One thing to remember is that markets go up and down, offering returns or losses in cycles. The more sophisticated an investor is, he should be able to calibrate his risk appetite depending on the cycle of the market.

Q9: How have Filipinos changed their attitude in investing in equities?

A: Filipinos have become more aware of equities as an asset class. More importantly, there are signs that the average younger Filipino is looking at investing as a learned skill. Today, the speed of news and availability of market data requires connectivity, and as Filipinos are more connected, there are increasing ways on how to learn about an industry or a company. Web-based trading is also done digitally already, as well as app-based trading—so the investors get to trade real-time more and more. I think the stockmarket was more daunting to an average Filipino in the past, but with these tools becoming more accessible, Filipinos have embraced the art of investing. That said, the penetration is still very low. For those who invest directly in the market, the number of accounts that have online broking accounts would still be very — I would say below 500,000 mark across the industry. Another way of being invested in equities is through the unit trust funds of various banks and insurance companies. There has also been a major change in that Filipinos these days entrust their hard-earned money to professional fund managers, who can manage their risk and return profile in a pooled manner. Either way, Filipinos are looking for higher rate of return for their funds, and they are learning to do it via the equities market. In my job, I encounter a lot more maturity and discipline in the Filipino investor. I attribute that to the ongoing efforts of the Philippine Stock Exchange and other industry stakeholders in educating the Filipinos across the country, thus increasing their awareness on how to become an astute investor.

Q10: What are bright spots in the Philippine economy? How does that translate to equity investing?

A: The Philippine economy is undeniably in one of the most interesting times, either compared to global peers or compared to the country’s own historical record. I’ve been doing this job for close to three decades, and I’ve seen how the country has come from being one of the most ignored markets, to become one of the most interesting ones. We all read about how the Philippine GDP growth is superior to other Asian peers, growing 6.8% in 2016, but consider also the following: (a) Philippines has attractive demographics, such that its young population will be able to sustain growth; (b) Interest rates are at historical lows, thereby providing impetus for credit growth and investment growth; (c) Corporate balance sheets are strong, with companies investing in growth and new sectors; (d) there are pillars for growth to the economy, which is a consumer-driven economy. These include a USD25bn flow of remittances, a USD24bn BPO industry, and a third leg—USD5bn in tourism receipts—which could grow exponentially. To ride on these positives, listed companies have identified growth sectors. Today, we see companies investing in new areas such as infrastructure, healthcare, renewable energy, technology, financial services and the like. They are also tapping new markets—whether in the Philippines or in ASEAN or globally. Companies like Jollibee, URC, ICTSI and SMPH — all have invested overseas even as they are strong domestically and after seeing double digit growth levels. Being ahead in the other markets will be able to boost their growth potential over the medium term.

As an average investor, investing in equities provides growth opportunities and access to these sectors. Meanwhile, the local economy still needs to see new investments in underinvested areas. I think the current administration is on the right track. It is looking to boost infrastructure spending, shift some of the flows to the VisMin areas, and to underinvested sectors such as education and social services. Philippines is also unique in that growth is driven not just within Metro Manila. Regional centers are growing at a faster pace, and listed companies are embarking on these growth opportunities.

Robby Go, CEO of UBS Securities, speaking at the 15th Mansmith Market Masters Conference on May 8th in The Fifth Rockwell, shares insights about sensemaking skills to understand how to win in the marketplace.

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