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So far this year, what a ride it has been for investors in the Philippine equities market. August, the most cruel of months for equity investors, has just become a fleeting memory -- but not before erasing 2.1 percent off the market’s value.
Moreover, since hitting an all-time high of 5,403 at the start of July, the benchmark index has been suffering daily from “death of a thousand downticks,” recently trading as much as 4.5 percent below the July peak.
Unfortunately, more bad tidings lie in store this September, which will surely have stock market investors droning “...The innocent can never last, wake me up when September ends.” September happens to be the second worst month for investing in stocks, with an expected negative return of 0.8 percent, based on the past 25 years’ market trends.
Although there’s a 48 percent chance that September can dig itself out of the hole, the market this year does not look that blessed. All the trail signs point to a further decline along the road, with the worst scenario indicating as much as a 6 percent monthly plunge towards the 4,890 line.
Why so negative, especially since the country’s economic results have outpaced the performance of most of its Asian neighbors?
The short answer is this: There’s a lot of negative developments that far outweigh any good news at this point. First and foremost would be the absence of any market bounce from the GDP growth news.
On top of that would be the growing evidence of a worsening Chinese economic slowdown, the worldwide inflation in the prices of commodities, the impending fiscal cliff in the US plus the next-shoe-to-fall in the long-running Euro crisis, and the resulting rising risk premiums across the globe.
Local market among priciest
Going forward, the ECB meeting this Thursday and the US Fed meeting on September 12-13 will likely dash investors’ hope of announcements of further quantitative easing and other extraordinary monetary measures.
It is highly instructive that immediately following the government’s announcement of a higher-than-expected 5.9 percent economic growth in the second quarter, the market essentially had to stifle a wide yawn. The day the GDP report came out saw the PSE index losing 0.8 percent, while the following day saw it recovering 0.9 percent, which meant the market index merely jogged in place.
One reason for this investor ambivalence is the fact that the market fetched more than 16 times forecasted earnings for the year at its peak and currently trades at around 15.5 times, above its long-run average of 14.9 times earnings.
These ranges do not appear to be that wide but, being multiples, small changes can be significant. For instance, if the PSE index were to trade at its long-run price-earnings ratio of 14.9 times, it would be closing near 5,000.
The local stock market is now considered one of the priciest among developing markets this year. For it to attract foreign interest once again, the market would have to moderate towards more reasonable levels.
Shaky quality of economic growth
Aside from market price levels already discounting the country’s economic growth, the other reason for investors’ disinterest would be the shaky quality of the economy’s performance. On the demand side, the main driver of growth would be government spending, which surged almost 6 percent in the second quarter, a sharp rebound from its 2011 slowdown to one percent.
The next main driver was household consumption which, boosted by inward remittances, grew 5.7 percent in the quarter. However, this reflected a deceleration from its 2011 growth of 6.3 percent, bearing out the negative consumer sentiment that has been coming out in surveys done by the Bangko Sentral ng Pilipinas.
While it is true that government still has fiscal leeway to pump prime the domestic economy, it also obviously cannot go on doing so indefinitely.
The abrupt surge in the prices of commodities, including foodstuff, provides another hurdle to the equity market’s near-term rebound. Widespread drought in the US has pushed the prices of basic agricultural commodities, such as corn and soybean, to new records.
The one remaining silver lining, at least as far as Asian nations are concerned, is that the price of rice has been so far spared from this global price surge. Nonetheless, inflation is seen to edge higher in the coming months, putting upward pressure on benchmark interest rates. In the last Treasury bill auction, monetary authorities already signaled their willingness to allow interest rates to ratchet higher. This, as well, would be negative to equity valuation and prices.
Also putting a lid on investor sentiment would be the fear that the US economy would be pushed off the fiscal cliff early next year if the Democrats and Republicans fail to come to terms. The US fiscal cliff refers to the expiration of the Bush tax cuts and the automatic budget cuts, both of which would reduce the US government’s deficit spending and, as a result, push the US economy back into recession.
PSEi to end year near 5,000
The very first Random Walker article (dated January 24, 2012) had this to say: “...on the more optimistic side, it may be observed that the P/E valuation expands to 17 times, above its long-run value, following a bad year. At this valuation, the PSEi would be targeting 5,402, which represents a 24 percent year-on-year gain.” That has already come to pass, with the index hitting a record peak of 5,403.60 in July.
That piece further predicted thus: “Again, going by long-run average, the Philippine market has returned around 14 percent on average since 1987. It would not be far off to guess that this year’s gain would be near that number, and the PSEi target would be near 4,980.”
At this point, this writer’s guess is not that far off from the original prediction: the PSE index will likely end the year near 5,000. Just an opinion, mind you.
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