OUTSIDE THE BOX
PRICES on the Philippine Stock Exchange (PSE) took another massive hit yesterday with the blue chip index down 164 points, or 4.24 percent. The All-Share Index fell 2.94 percent. Interestingly, we started this week as the worst-performing stock market (except for Thailand) in Asia yesterday.
The same thing happened on Wednesday when we were down much more than the rest. I wondered aloud on Twitter if we were overdoing the selling or if Philippine investors were more accurate in predicting a gloomy future than the rest of the markets. As it turned out, the PSE was right, as the rest of Asia caught up with the drop on Thursday and Friday.
This is a new week and our stock prices are still going down in a big way.
Are PSE investors unsophisticated about how bad things really are and should prices be going so far down?
Or are PSE investors ahead of the curve, not shallow at all?
The move that took the PSE index from below 2,000 to over 4,000 began in the fourth quarter of 2008. That was about the same as for the other regional exchanges. It took a few months longer from the stock markets in the West to bottom up. But through the bull market, both Asia and the West have pretty much tracked each other’s performance.
However, in terms of economies, there is now a divergence that should be seen in the performance of stock-market prices. Asia’s economies, particularly the smaller ones, are growing; the Western ones are not.
Of course, we are led to believe that all the world’s economies, big and small, developed and underdeveloped, Western and Eastern, are on the same potentially sinking ship. That may be true in a general sense, but is it true for the Philippines?
When looking at how stock prices could move, we need to examine the broad national economic picture, look at the projected financial performance of the companies, and then figure what the stock prices should be.
I believe it is at this point, that the Philippines will move off the road that the others are passing on.
Bank of the Philippine Islands (BPI) released its latest monthly economic research on September 15. Normally I am hesitant to accept this type of analysis because there is often a disconnect with the total range of economic activity. Official numbers often do not show the full extent of what is going on in the economy.
However, BPI accurately forecasts lower-than-expected growth through the rest of 2011. But it also says the Philippines is in “a better position to withstand another global economic downturn and financial shock waves.” Allow me to quote a portion of BPI’s report:
“We could hardly conceive the Philippines falling into recession should the world’s economy contract once more, given our relatively minimal exposure to global trade, while most overseas Filipinos are deployed in critical, recession-proof industries and still provide a historically reliable stream of foreign inflows. What was true in 2009 is still true to this day.”
That last sentence is the key to the deal. If 2011 is a repeat of 2009 (and it looks like it will be), we came through that period well and we should do even better this time in relation to most of the world. The macro looks good.
Now if the macro is acceptable, then corporate revenues and profits will be even better than in 2009 as local companies are now leaner (less debt) and meaner (more adaptable to changing conditions) than before.
Now to stock prices. At this time, stock prices are historically low in comparison to corporate financial valuations and in comparison to other countries. That should be favorable for future price movements.
However, I see the potential for prices to fall even further. Not guaranteed but possible. But at some point in the near future, prices will begin to move significantly higher than they are today.
PSE investors, local Filipino investors, are very sophisticated because they are accustomed to moving quickly and they do recognize investment value when they see it.
The one missing piece that I did not mention above is government policy. This is one-note tune administration; corruption. That is not bad but it is not complete. Deteriorating global conditions may force policy-makers to address the government’s direct role in the economy. Once that happens, you will see greater economic action and that will translate into higher stock prices.
On a personal note, I invite you to visit mangunonmarkets.com. Now is the time to protect capital and prepare for opportunities. You can gain access to the PSE Strategy Guide for stock-market investors, as well as other content.
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