“Dragons” dancing, confetti falling, champagne bottles popping, bells ringing. These are some of the familiar scenes on the stock exchange trading floor during a listing ceremony of an initial public offering (IPO).

More than pomp and pageantry, the day a company begins trading on the stock exchange is always a reason to celebrate. After all, private companies seeking to raise capital and access deep pools of liquidity through an IPO have to undertake a challenging but worthwhile and rewarding journey.

First Metro Investment has been conducting investment briefings to urge firms to go public or guide them in their IPO journey. Here is its step-by-step guide on preparing for a stock market debut:

1. To list or not to list? This is the question that you may want to answer before you decide on going public. By definition, an IPO is the first sale of stock by a company to the public. So if you are looking to grow your company and need to raise capital to expand, then having an IPO can help you. Aside from accessing public capital, IPO issuers also benefit from enhanced liquidity, wealth creation, tax efficiency, well as enhanced public reputation and image.

2. Ready for changes? Successful issuers know that having an IPO is like a transformation — a metamorphosis from being privately owned to publicly listed. With the benefits you get to reap from an IPO come the responsibilities. These include sharing company ownership and financial gain with other investors (including small ones), being more transparent by disclosing to the public any material information that might affect the performance of your stock, and being subjected to tighter regulatory scrutiny, among others.

3. Prepping for the journey: The process leading up to an IPO is extensive, but preparing early and thoroughly can make all the difference. In preparing your company for this milestone, First Metro Investment has prepared the following roadmap:

12-24 months prior to IPO:

• Develop a good business plan and equity story.
• Prepare a 3-year Audited Financial Statement by a reputable auditor (SEC Class A) and interim Financial Statement.
• Start acting like a listed company — i.e., adhere to the highest standards of corporate governance principles and practices, ensure compliance with laws and regulations and reportorial requirements, ensure a good corporate structure.

6-12 months prior to IPO:

• Refine your business plan and equity story.
• Build an internal IPO working team.
  • This should include a senior executive from your company to make critical decisions, and the following departments: Investor Relations, Compliance, Legal, Finance, Business Development/Marketing, and Corporate Planning.
  • It is highly recommended to appoint an overall point person from the company who will be responsible for the timely execution of IPO-related activities.
• Appoint an external IPO team.
  • For a domestic listing, the following parties are required:
    • Issue Manager/Bookrunner/Underwriter
    • Legal Counsel for Issuer
    • Legal Counsel for Underwriter
    • Receiving/Stock Transfer Agent
    • Custodian/Depositary Bank
    • Escrow Agent
  • If you plan to offer some shares abroad, on top of the external domestic team, the following are required:
    • International Issue Manager/s and Bookrunner/s
    • International Legal Counsel for Issuer
    • International Legal CounselUnderwriter

4-6 months prior to IPO:

• Refine your business plan, establish your use of proceeds, and equity story.
• Produce a draft prospectus and a Registration Statement.
• Prepare your Investor Relations Program and PR strategies.
• Meet with the regulators: Securities and Exchange Commission and PSE.
• Finalize your timetable.

4 months prior to IPO:

• Review filing requirements before filing with regulators.
• Submit filing requirements.
• Prepare presentation materials emphasizing your company’s equity story.

6 weeks – 3 months prior to IPO:

• Finalize your use of proceeds and equity story.
• Firm up your valuation.
• Respond to regulators’ comments in a timely manner.
• Start your marketing strategy, including formation of a selling syndicate.

6 weeks prior to IPO:

• Start deal roadshows.
• Bookbuilding
• Pricing
• Offer period
• Comply with final listing requirements.
• Hold a listing ceremony at the Philippine Stock Exchange (PSE).

If you think your job is done after you have rung the bell at the PSE, think again!

When the excitement has died down after your company has gone public, the real hard work begins. As a public company, you will now lead a life post-IPO focused on complying with all relevant regulation, and ensuring complete and timely disclosure of material information to the public.

Most of all, it is all about delivering on the promises you made to investors when you were asking them to buy your equity story. At the end of the day, the success of an IPO is not just about the money raised; it is about how investors have put their trust in the company and placed their bet on its long-term growth.

In 2020, the race was about getting a vaccine for COVID-19. Nine months after a global pandemic was declared by the World Health Organization in February 2020, news of the first vaccine discovery sent stocks and bond yields soaring on hopes an economic recovery will happen sooner rather than later.

In 2021, the race turned to vaccine rollouts. On the first trading day of the year, major stock markets welcomed the news that some COVID vaccines were ready for distribution.

While questions still linger over the vaccines, financial markets get a shot in the arm every time a vaccine-related positive development hogs the headlines. After entering a global economic recession, any sign that leads to recovery is being taken by investors as a cue to buy stocks.

“The recovery of the markets rests heavily on the success of the country’s vaccination program.  Should the vaccination program proceed in earnest and a larger part of the population will be inoculated, the government can further open up the economy. This should significantly improve investor confidence in the country,” said Edser Trinidad, head of Investments and Research of First Metro Asset Management, Inc. (FAMI).

How the Philippines stacks up

In the Philippines, the first batch of vaccines arrived on March 1, 2021, and was followed by the sporadic arrival of supply and inoculations.

Two months after the rollout, the country continues to lag behind its neighbors in the ASEAN, according to The ASEAN Post, a digital media organization that tracks regional developments. Citing figures from Our World in Data, it showed the Philippines ranked third to the last among 10 ASEAN member-countries based on COVID-vaccination doses administered per 100 people.

The slower than expected vaccine rollout is reflected in the Philippine stock market’s performance versus its regional peers. Year-to-date, the Philippine Stock Exchange index (PSEi) had contracted by 13.17 percent — the worst among the 10 bourses in the region. The index has dipped by 8.6 percent year-on-year — the second-worst performance after Singapore’s FTSE Straits Times Index, which lost 11.7 percent.

In the case of the Philippines, there are several reasons for the weak performance of the PSEi.

Apart from the vaccine rollout and procurement, analysts are also closely monitoring the number of COVID-19 cases in the country, as this serves as an important indicator of the pace of economic recovery. As the table shows, the stock market of countries that have successfully contained the spread of the virus and have started to open up their economy has been posting strong performance.

Another reason is inflation. Investors are worried that the Bangko Sentral ng Pilipinas (BSP) may tighten liquidity by raising policy rates to stave off inflation. This can affect the borrowing cost of companies which, in turn, can scuttle the country’s recovery efforts. Consumer appetite, which remains weak because of the pandemic, can also be further dampened.

For the fourth month, inflation in April remained above the BSP’s target, with headline inflation staying at 4.5%. While it was unchanged from March, inflationary pressures from the index-heavy food component and transport costs persist.

Where’s the light?

The proverbial light at the end of the tunnel depends on the changing dynamics of the crisis.

However, the picture might change by the second half of 2021, as more vaccines become available for the local population. This is expected to speed up the easing of lockdown restrictions, and allow the economy to function at full capacity. Consequently, the economic recovery will generate more jobs and improve household income, leading to higher spending power and better corporate earnings.

Swift recovery for the local bourse may also be expected, given that the average foreign ownership on listed companies is now at a 10-year low. This means local investors, including retail, are seen to fuel market sentiment as positive developments on the vaccine availability and rollout trickle in.

According to First Metro Securities Research, investors must keep an eye on key sectors that could benefit from the sudden pent-up demand. These are those related to transport and mobility, tourism, events and social gatherings, mall foot traffic, and food services.

It also pays to keep track of other markets, particularly those in the region, said FAMI’s Trinidad. “Given that economic interdependence among countries is higher than ever, it is important for a stock market investor to pay attention to what is happening in other markets as it provides a big picture of what is happening in the global economy, which can eventually impact the local market,” he said.

Looking at the regional markets also provides a glimpse on how foreign investors behave, including in which markets they prefer investing. Several regional markets have managed to perform better than the Philippines largely because of foreign investment inflows. Due to the strong performance of these markets, foreign investors may be on the lookout for other markets that have lagged behind but the fundamentals are still improving or about to improve, he added.

While the speed of economic recovery among regional markets may be uneven, there are still opportunities that the Philippines can take advantage of. “Once the COVID-19 surge has been contained and a substantial number of vaccines starts to arrive, then it will be just a matter of time for foreign investors to return to the Philippines,” said Trinidad.

Find out your risk appetite

As COVID-19 continues to spread and mutate in many parts of the world, some investors have opted to remain on the sidelines for fear of losing the shirt off their backs. Some, however, look at “crisis” and “opportunity” as a pair, much like “risk” and “rewards.” Fear may hold them back from taking on risks, but it is only when they dare that they get to reap the rewards.

Or as some put it, “It’s better to be a lion for a day than a sheep all your life.”

When it comes to investing in the stock market, how do you know if you are a lion or a sheep? How would you know if your “risk appetite” — the amount of risk you are willing to accept to pursue your investment goal — is high or low?

Financial advisers use psychometric tests to assess their clients’ attitudes towards risk and their risk tolerance. This is in addition to profiling their income, expenditure, assets, liabilities, and investment timeframe to work out the clients’ capacity for loss.

There is no golden rule or global standard when it comes to evaluating an investor’s risk tolerance. Still, it is best to know your risk appetite first before you put your hard-earned money on an investment. An accurate assessment of your risk profile is important to determine if the investment you choose matches your investment horizon, financial goals, and willingness to secure investment rewards versus risk.

If you don’t have a financial adviser, you can still find out your risk appetite by answering these five basic questions:

What am I investing for? (Your investment goal)

When do I need the money? (Your timeframe or investment horizon)

Do I understand the investment I am making?

How much am I willing to invest to achieve my goal?

Do I want to be an active or passive investor?

Active vs Passive Investing

To answer Question No. 5, you need to know the difference between active and passive investing.

Active investing demands a hands-on approach to making buy-sell decisions on your stock investment. You may need to tap a professional portfolio manager who knows how to beat the stock market’s average returns, take full advantage of short-term price fluctuations, and seize the opportunity in information flows. You will benefit from their in-depth analysis and expertise in knowing exactly the right time to buy or sell.

Passive investing, on the other hand, means investing for the long haul. You only have to adopt two strategies: to buy or to hold. You resist every temptation to react to or anticipate every move or development in the stock. Some passive investors buy an index fund that tracks the movement of major indices or mutual funds (more on this in our next issue). Compared with actively managed funds, investing in index funds is more cost-effective as it entails lower expenses and fees.

For the Lionhearted

Choosing to be an aggressive investor means you are willing to risk more money for the possibility of better returns. This makes sense only if you have the luxury of time or have a long investment horizon. But if you need the money very soon, take caution. As you move closer to your investment goal, you need to adjust your strategy to protect your gains.

If you are an investment newbie, it also helps to build an emergency fund before you start investing. Make sure you have set aside cash for unexpected events such as for medical emergencies or job loss. The last thing you need is being forced to sell your assets in a down market like in this pandemic.

For those with a high-risk appetite, First Metro Asset Management (FAMI) recommends its balanced fund and equity-laced funds. “These funds provide returns that beat inflation and are ideal for meeting long-term goals such as retirement, funding children’s education, or business capital,” said Sheila Limon, head of Sales at FAMI.

For the Conservative Sheep

For those who opt to stay on the conservative side, there is no harm in starting out as a sheep. But if you have many years ahead of your investment goal, you may want to overcome your fear and be a little bit more aggressive. Being too conservative can be damaging if it prevents you from growing your portfolio fast enough to beat inflation over time.

If you have more cash to spare than what you need for emergency or daily use, you may want to invest more to make your money work harder for you. Focus on your long-term goal and ride out the short-term peaks and troughs in the market.

For those with low-risk appetites, Ms. Limon recommended money market, fixed income, and dollar bond funds. “These provide prudent price appreciation without the high volatility of the stock market. They are also perfect for goals that are in the short- to medium-term as they give investors returns that is potentially higher than the usual time deposits, government bonds, and even corporate papers,” she explained.

From Sheep to Lion

While conservativism has its merits, you cannot become rich by staying meek as a sheep forever. Investors with a low-risk appetite can still improve their risk appetite.

One way is to determine where your financial goals are in your time horizon. One or two years of a down market would not matter if your financial goal is still 20 years down the road. Long-term goals (10 years or more) can be funded with equity-laced investments that beat inflation and significantly increase in value over time. These investments also require less money to fund these goals, as they provide more returns for the long term. This means you will have more resources available to meet other needs and financial goals.

Take courage to step outside of your comfort zone. Educate yourself and read up on investing before you move forward. Then start by making a small investment in a riskier asset, then grow it slowly over time. You will learn how to do things as you go. Every small win will boost your confidence and every loss will teach you important lessons that will help you get it right the next time. Either way, you build the confidence that comes with experience.

If you want to undergo training, take advantage of the many options available in the market. First Metro Securities (FirstMetroSec) offers free online seminars, as well as resources on YouTube and Spotify. Its podcast, Philippine Stock Market Weekly, is one of the most popular Filipino business podcasts on Spotify and serves as a go-to source for timely economic and market insights.

All these mean that a conservative investor can still invest in riskier investments if they are clear with their financial goals and investment horizon. History, after all, has shown that the stock market always rises.

“Current stock market levels are even much higher than before the 2008 Global Financial Crises. These would be the best time to buy as prices are cheaper,” said Mark Angeles, head of Research of FirstMetroSec.

Like many of its neighbors in the region, the Philippine stock market was badly battered by the COVID-19 global pandemic, with the Philippine Stock Exchange index (PSEi) dipping by 8.6 percent year-on-year.

As foreign investors headed for the exit door, retail investors are left holding the fort, emerging as saviors driving liquidity and moving the market.

In 2020, local investors accounted for 55 percent or P7.35 billion of the daily average trading volume in the PSE. Of this, slightly more than a quarter was from retail investors. In the first quarter of this year, retail investors accounted for more than 45 percent of market turnovers.

While investors, in general, remain cautiously optimistic about the Philippine stock market, retail investors continue to find gems in the battered market. These are mostly young, tech-savvy millennials who are awash with cash, and are trading online. Their sudden influx into the market is the reason many leading stock brokerage houses had to temporarily halt new account openings or invest in additional bandwidth to accommodate the surge of online trades.

The heightened participation of retail investors is a good sign that the local stock market still offers plenty of opportunities for those who are willing to look beyond short-term gains. With more familiarity with the local market and growing maturity in investing, these investors have been buoying up interest in listed shares and enabling the economy to recover faster from the impact of the pandemic.

Here are some of the opportunities they see in the Philippine stock market:

1. Potential to earn higher than bank deposit yields. Since the pandemic started last year, the Bangko Sentral ng Pilipinas (BSP) has been cutting its policy rates and banks’ reserve requirements to stimulate lending and consumer spending. This has been driving down interest rates to record lows, a trend expected to prevail throughout 2021. Cash-awash individuals thus turned to stock investing instead of placing their funds in banks which offer interest rates no higher than 2 percent per annum. In comparison, stocks offer the potential for a higher return (the average return in the Philippine stock market is 6.40 percent in the last 10 years).
2. More access to listed shares. One of the silver linings in the pandemic is the emergence of online stock trading due to digital transformation. This led to more market participants and opened up earning opportunities to more Filipinos, especially those who lost their jobs or closed their shops because of the pandemic. With more stock brokerage houses going online, building your wealth through stock market trading is now possible even without leaving the comfort of your own home. Investing in your favorite stocks takes just a few clicks on your smartphone or a few taps on your keyboard.
3. Exciting IPOs and REITs from capital-hungry companies. With banks reaching their single borrowers limit and turning more risk-averse, companies have been turning to the local bourse and the fixed income market to raise capital that will allow them to weather the pandemic. This has led to a proliferation of corporate issues and listings. This year, at least four real estate investment trusts (REITs) and three initial public offerings are expected to stir excitement among investors in the local bourse. This includes consumer food conglomerate Monde Nissin, which is expected to be the country’s largest IPO.
4. Poised for a recovery. Despite some setbacks, namely the continuous spike in COVID-19 cases which prompted the government to return to more restrictive measures in Metro Manila and nearby provinces, 2021 still promises to be a better year than 2020 for the PSEi. The vaccine rollout should lead to improved investor sentiment. However, the transitory nature of the crisis makes it difficult for stock market experts to forecast when the recovery will actually be.

Investing strategy

In this fickle environment, Edser Trinidad, head of Investments and Research at First Metro Asset Management Inc. (FAMI), advises investors to “buy the dips and look for reopening plays that are trading at a discount.”

He cited the telecoms and consumer staple sectors as the sectors most resilient during this pandemic. “A big portion of the workforce are in a work from home setup so demand for bandwidth surged, benefiting the telecom sector. The lockdown has also forced consumers to do pantry loading, which favored the consumer staple sector,” Trinidad explained.

For Mark Angeles, head of Research at First Metro Securities, cyclical sectors that can leverage on the economic recovery such as property, banks, and some consumer-related businesses have good earnings potential. Once the community quarantine restrictions are relaxed and more businesses are allowed to reopen, sectors related to restaurants, beer consumption, malls, cars, and property would also make good plays, he added.

Both investment gurus agree that the current market condition presents a good opportunity to invest as the market now has limited further downside. Foreigners holding Philippine shares are now at a 10-year low so the selling pressure from foreign funds has now eased.

“Cost averaging is highly encouraged. Do not invest in one swing! Invest in tranches. Buy during market dips,” said Trinidad. He quoted legendary Omaha investor Warren Buffet, who said: “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”