Friday, 22 June 2012

Why the PSE is goingn higher

John Mangun

Before any politician steps in to claim the credit, I am officially taking responsibly for the accomplishment of the Philippine Stock Exchange (PSE) going up during the next months.

I am, however, willing to share the recognition of this achievement with you and everyone else who is a stock-market investor because it is our money, not the governments’ nor the politicians, which will push prices higher.

Prices go up, not because of political policies or programs, and most certainly not due to politicians’ speeches. Stock prices advance because you and I firmly believe we can make money buying shares.

The stock market is the ultimate self-fulfilling prophecy. I think prices are going up. I buy. Because of my buying, prices go up. It’s magic!

There is an old stock market saying that when everyone is buying, you want to be selling. That is true. But very rarely does “everyone” buy or sell at the same time. What you want is to be doing what the majority of investors are doing. Right now, most investors are buying. When most investors are selling, I will sell also because the majority is the boss in moving prices.

As I have said many times, the peso is going to continue to appreciate. That is the first reason why the market is going up. Foreigners like to invest in countries’ stock markets where the currency is appreciating. Their investment gains from the stock price going higher and from the currency going higher. For local investors, as I mentioned before, if my gasoline and other imported products’ costs are lower because of a stronger peso, there is more money to put into the market. Also, many local companies’ raw material and capital costs will be lowered thus making them more profitable.

The Bangko Sentral ng Pilipinas cannot hold the peso back from market appreciation without suffering large foreign-currency losses. The appreciating trend is in place and that will move stock prices favorably.

The idea that the local market is expensive in relation to other regional markets is not entirely valid. Using a Price Earnings Ratio (PER), our market is higher. However, a more accurate reflection of relative value is PEG or Price to Earnings Growth. This measures the growth of company profits against price. Here the Philippines is better than the others and therefore allows for additional longer term price appreciation. PER is a snapshot; PEG shows the profit trend and forecasts future price potential. PHL wins.

The government’s expectation of getting a higher credit rating soon is wishful thinking. The global financial institutions have no intention of letting this happen. They want to buy as much the PHL government debt at the current higher interest rates. They will hold off a ratings change as long as possible.

When the higher rating comes through, their holdings of government debt paper will be worth more and they will have locked in a high interest rate. In fact, if you have long-term cash holdings that you do not need to touch, buy the PHL government 10-year bonds. You will be happy you did.

However, that credit-rating increase will come in early to mid 2013. All PHL interest rates will go lower and will create more cash in the system, a portion of which will go to stock market purchases, pushing prices higher. Real estate sales will also benefit from lower interest rates and help push up the price of the property companies listed on the PSE.

Major listed companies in the Philippines have two strong financial advantages that will show up in higher stock prices. Unlike in the West, our corporations have cash and also available credit. Quietly, many local firms are forming joint ventures with and even buying financially distressed Western firms. The government may not know how to take advantage of the global financial crisis but local companies do know how. These companies are gaining markets and profits at the same time.

Buy the peso. Buy the PSE. Both are going higher.

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