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During cocktails in Seoul right after an international conference on capital markets regulatory reform, in the course of the usual small talk, a Philippine participant plaintively asked this writer: “So, what do you think of the Philippines market?”
Not wanting to be the harbinger of more dreadful news, this writer responded that the month of May is supposed to be a less auspicious time for equities. This sentiment, in fact, has been enshrined in the market adage: “Sell in May and then go away.” Of course, the worst month for equities is August, known as the “ghost month” to all and sundry, but that’s still about two months away. This writer quickly added that “no matter where the market index goes, whether bear or not, people should still be able to make money” in the market, so long as they do their homework.
People these days appreciate simple words of encouragement such as these, as the international press churn out non-stop gloomy articles about how bad the equities industry is, and how much it would worsen in the future.
The UK-based Financial Times, for one, came out with a longish piece entitled “Markets: Out of stock,” which talked of how “the end of a six-decade passion for equities could lead to a less flexible, more conservative model of corporate financing.” It ended on a dark note that there is “no natural flow into equities” for the next five to 10 years and that “the rules of the game have changed”.
A couple of days later the same paper published an article titled “Cult of equities is dead. Long live equities,” which started in typical droll British humor with “the prayer of all financial commentators: ‘O Lord, save me from becoming a contrarian indicator.’” It likewise sees a bleak near-term prospect for equities due to “financial repression,” where fund managers are forced by regulation to invest in low-yielding bonds. “This is financial repression – to deal with the debt they took on to quell the credit crisis, governments are forcing us all to lend to them at ruinously low rates. While artificial incentives to buy bonds stay in force, bonds could stay expensive – and equities could stay relatively cheap.”
It would appear that the Philippines has escaped the worst of the gloominess besieging the developed markets. Since retreating from the record peak of almost 5,330 and hitting a recent low atop 4,860, the PSE index seems to have found some firmer footing above 4,900.
“Seems” would be the operative word, however.
Despite losing most of its gains this year – having risen as much as 22 percent at its peak – the market remains up 13 percent since the year began. Its valuation, while not pricey, is not that cheap as well. By this writer’s calculation, the market currently trades at around 15 times this year’s earnings (P/E ratio) and yields almost 2.5 percent, which is well below the 10-year yield on bonds of 5.8 percent. Stocks are supposed to yield less than bonds since sales, earnings and cash flows can grow while the cash flows of bonds are fixed. The market, furthermore, has a P/E to growth (PEG) ratio of about 1.2 times, about equal to its long-run average as well.
By any measure, therefore, the market is not cheap, nor is it pricey. It’s what Goldilocks of the Three Bears fame would have called “just right.” Market analysts would, on the other hand, term it as “fairly valued.”
And that can be bad news for the market. Cheap valuation is the main motivation for fund managers to jump into equities. But without this incentive, fund managers are not likely to chase prices higher and their wariness can be seen in the market’s dismally low trading turnover. The Philippines’ first-quarter national income accounts, mainly GDP, would be announced at the end of this month but most of the economy’s growth, seen at range of 4.5 to five percent, has been reflected in the market.
Where do these lead to? The bottom line is that the market’s downturn, in all likelihood, has yet to run its full course. At its recent low, the market lost less than nine percent from the peak, when a true correction usually calls for a 10 percent retracement. That would be at 4,790, but due to markets’ penchant for overshooting, the market could correct to as low as 4,600.
As stated at the start of this piece, people can make money in any type of market. It’s just going to get harder in the coming months to do so.
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