Philippine Stock Market Commentary Update_COL Financial

An update of the Philippine Stock Market. Philippine Stock Market Commentary by COL Financial Research. COL Financial is the Philippines No.1 Online Stockbroker.

The Philippine Stock Market - Guilty by Association
By: April Lynn L. Tan, VP and Head of Research, COL Financial

Since trading resumed last week following the long break caused by the floods, the Philippine stock market has fallen by a total of 14.7% while the peso has weakened by 1.5% as of this writing. This was triggered by the steep decline of other Asian stock markets and their currencies as these countries announced surprisingly weaker than expected economic numbers.

Last week, Indonesia announced that its current account deficit widened to 4.4% of GDP. In Thailand, the government disclosed that GDP contracted for the second consecutive quarter during 2Q13 on a quarter-on-quarter basis, implying that the country entered into a technical recession. In Malaysia, the government reported that 2Q13 GDP grew by 4.3%, lower than consensus expectation of 4.7%. Also contributing to negative investor sentiment was the prevailing concern over the tapering of the US Fed's bond buying program which would lead to reduced liquidity and higher interest rates.  Due to the said factors, the stock markets of Indonesia, Thailand and Malaysia fell by 15.8%, 10.5% and 6.2% respectively during the past six trading days while their currencies depreciated by 8.3%, 2.9% and 2.1%.

Although the sharp drop of the stock market is worrisome, it should not be a reason for investors to avoid investing in the Philippine stock market. In fact, we would like to reiterate what we said during our mid-year stock market briefing entitled "The Tides of Opportunity," that while the Philippines, Indonesia, Thailand and Malaysia are all part of ASEAN region, the Philippines is less vulnerable to the prevailing external threats compared to our neighbors due to the following reasons:

• The Philippines is less dependent on exports, especially of commodity products. The main reason why the economic growth and current account positions of our Asian neighbors are deteriorating is because of their large dependence on exports, especially of commodity products. Note that demand for these products is currently being negatively affected by the ongoing restructuring of the Chinese economy away from the industrial sector. Gross exports account for only 30% of the Philippines' GDP vs. an average of 62% for Indonesia, Thailand and Malaysia. Meanwhile, exports of commodities account for an even smaller share of the Philippines' GDP at only 3.8% vs. an average of 21.5% for the other three countries. 
• OFW remittance, which is a major source of US dollars for the Philippines at almost 9% of GDP, remains resilient. While Philippine exports fell by 4.4% during the first six months of this year to US$25.6 Bil, OFW remittances continued to increase by 5.6% to US$10.7Bil during the same period.
• Consequently, while the current account position of our ASEAN neighbors is deteriorating, the current account position of the Philippines remains healthy. During the first quarter of 2013, the Philippines posted a current account surplus equivalent to 5.3% of GDP, much healthier than that of Indonesia (-2.4%), Thailand (1.2%) and Malaysia (3.3%).
• Finally, while GDP growth forecasts of our ASEAN neighbors have been downgraded, the GDP growth forecast of the Philippines has been upgraded.

 In other words, the Philippine market fell because it was found "guilty by association" and not because the country was fundamentally weak.

Admittedly, the downward pressure on the local market will most likely remain as numerous factors outside of the Philippines continue to affect the PSEi's short term performance. These include concerns regarding the US Fed's tapering and its impact on interest rates and exchange rates globally. Falling commodity prices and weak exports resulting from the ongoing restructuring of the Chinese economy are also expected to continue negatively affecting investor sentiment towards Asian stocks, including the Philippines. These concerns are reflected by the PSEi's poor technical picture.  According to our Head of Technical Research Juanis Barredo, the PSEi could reach as low as 5,226 after it broke the 6,100 support yesterday and its June low of 5,678 today.

Nevertheless, since the prevailing weakness of our local stock market is brought about by external factors, we are confident that the PSEi will recover faster compared to its Asian peers once risk appetite normalizes and investor sentiment improves. Although we are not recommending investors to buy aggressively, the prevailing correction should be viewed as an opportunity to slowly accumulate stocks at attractive valuations over the next six months. (Please refer to our "COLing the Shots" model portfolio for the list of stocks that we like.)  Note that following the market's steep decline the past few days, the PSEi is trading at only 14X 14E P/E, at par with its 10-year historical average forward P/E. This is despite the fact that the yield of the Philippines' 10-year T-bond is only 3.4%, less than half its 10-year historical average of 8.1%.


To get a better understanding of the prevailing stock market situation, why we maintain a positive long term view, and suggestions on how to capitalize on the opportunities available, please review our mid-year market briefing entitled "The Tides of Opportunity." (Click here to access the full report.) We will also provide updates on a regular basis to guide you through these turbulent times.

Source: COL Financial

As of this writing, it's the best time to invest in the stock market. The best time to invest in the stock market  is when the price is low and the time is now. A mentor of mine Bo Sanchez "TrulyRichClub" said, this may go even further. So invest, plant seeds, have fun investing!

Be blessed and be a blessing!

Jesse Cadelina
Truly Rich Club Member

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