Last week financial giants in the US fell to their knees – casualties of a financial crisis that started 13 months ago. Investment goliath, Lehman Brothers, collapsed after talks of a possible rescue failed. Another Wall Street giant, the century-old Merril Lynch, wouldn’t have survived if not for the $50B takeover of Bank of America. AIG, the world’s largest insurer, was near death when it got a lease on life with an $85-B bailout by the US government. Morgan Stanley, one of two independent investment banks still standing, are in merger talks and scrambling to find buyers as its shares dropped 24% last Wednesday.

The economic turmoil in the US, which some economists consider as the worst crisis since the Great Depression of the 1930s, rattled global markets. Stock markets worldwide tumbled immediately after the fall of Lehman. The rescue of AIG, the infusion of 600 billion dollars by central banks to prevent a global financial system crash and a US plan to rescue banks from soured mortgage debts have calmed the market somehow… for now.

Here at home seven banks were reported to have exposure to Lehman Brothers amounting to $386M (P17.8-B). Although the BSP has assured that this is not a cause for concern – the amount is less than 0.4% of the banking industry’s P5-Trillion assets – you can’t blame people from getting jittery.

Ordinary investors of PhilamLife, AIG’s local subsidiary, are the most nervous. Tens of thousands of policy and plan holders of Philam & its affiliates are probably worried silly about what’s going to happen to their insurance policies and pre-need plans. They shouldn’t lose sleep over the problems AIG is currently facing. Philam remains financially safe and stable, despite the troubles of its parent firm.

PhilamLife is the country’s biggest life insurance company – its P108-B in assets represents about one third of the insurance industry’s total asset base. It also has the biggest capitalization, most investments and the largest net worth among the 36 life insurance companies in the Philippines.

Policy and plan holders of SunLife are feeling jumpy, too. Canada’s SunLife Financial Inc. confirmed that it has $350M worth of investments in Lehman and another $315M exposure in AIG. Again, this should not be a major cause of concern for local investors. Most of SunLife Financial Philippines’ assets are invested locally.

Unlike in the US were people who bought policies and invested in AIG, Lehman and other beleaguered institutions have every reason to be gravely concerned, policy holders of Philam and SunLife should not panic. Both are on sound financial footing and they should be able to fulfill their commitments and obligations to its clients & investors.

Although the Philippines will not be taking a disastrous hit from the fall of Lehman and the problems of AIG, we will certainly feel the effects of the expected slowdown in the global economy. Investors of equity mutual funds & UITFs and investment-linked life insurance (whose underlying investments are placed mostly in stocks) are likely to experience a further drop in the value of their investments in the near term. Some equity funds are down by about 30% so far this year. And just when the market was starting to creep upwards, a major financial fiasco hits. In the next few weeks there’s no telling in what direction the local stock market is going. But it will closely follow the performance of the foreign market – which is anything but stable.

During these times of uncertainties in the financial system, ordinary, unsophisticated investors and savers can take refuge in the relative safety of bank deposits and government securities. You might want to stay away from equity funds and the stock market for now, especially if you are the type who feels nauseous with even the slightest bump in your investments. (Although some of the young and gung-ho investors who eat risk for breakfast will see the downturn as an opportunity to snap up bargains.)

If you are already invested in the stock market, mutual funds or UITFs, you may just have to endure the pain a little longer and hope to ride out the recent slump. Or you can bite the bullet – pull out and take the loss. Times like these only bolster the value of taking the long view when it comes to investing. Long-term investing allows you to weather the market’s frequent and sometimes prolonged dips.

It would help if you don’t monitor your investments on a daily basis to reduce your anxiety; try to shut out the bad news occasionally. A psychologist in the US recommends observing a five-minute rule for discussing the economic crisis and then moving on to less stressful topics. The psychologist in me suggests a 48-hour breather in between reading, watching or discussions of distressing matters.

Smart savers and investors should also consider cutting down further on unnecessary expenses. With miniscule returns on investments and savings, you should save as much as you can so you will be able to meet your financial goals. Your long-term survival depends on it.

Posted: September 22, 2008
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