Wall Street bloodbath wipes out Philippine gains
The bloodbath on Wall Street may have set back the local stock market’s recent climb to new peaks, but financial analysts believe that Philippine fundamentals would prevail in keeping the bulls at play.
The main Philippine Stock Exchange index (PSEi) on Tuesday wiped out all gains for 2011 as it slumped 4 percent, or 174.21 points, to close at 4,157.03.
It was the local market’s worst single-day decline in two years as investors were unnerved by the 634-point plunge of the Dow Jones Industrial Average on Monday after Standard & Poor’s downgraded America’s AAA credit rating to AA+.
The PSEi is now 1.05 percent lower than its closing of about 4,200 at the end-2010 and has pulled back by 393 points or 8.6 percent from its recent record high.
Value turnover on Tuesday was heavy at P8.2 billion. There were 12 decliners for every single gainer at the market.
Net foreign selling
“Foreign selling is the reason behind the fall in the PSEi. The reason for the selling is simple—foreign-based funds are taking profit to compensate for their losses in other stock markets,” said Eduardo Banaag Jr., vice president of First Metro Investment Corp.
Net foreign selling hit P1.54 billion on Tuesday and P1.63 billion on Monday.
Chief executive officer Sanjiv Vohra of Citibank in the Philippines said the beating taken by stocks reflected concerns on how the US economy would fare over the long term.
The landmark US agreement to raise the debt ceiling and avoid a sovereign debt default had assumed a higher growth path for the United States.
“The whole question is if the growth doesn’t happen, it will exasperate the fiscal situation,” Vohra said.
The local stock market, like other markets in the region, is in turn anticipating how the slowdown in the United States could affect the domestic economy.
“Fortunately, if you look at past history—which again goes back to the financial crisis, the Philippines has been resilient as it has very little reliance on net external capital or external flows,” Vohra said.
He said the Philippines “should be able to withstand [a US slowdown] relatively better than other countries that are more globally linked on a long term basis” because foreign capital as a percentage of its GDP (gross domestic product) was small.
Peso hardly affected
The peso-exchange and Treasury bond market have so far been hardly affected by the turmoil, he noted. On Monday, local T-bill rates fell across the board at the government’s primary auction.
Despite the hefty declines in the local stock market, the peso closed on Tuesday at 42.52, relatively stable from Monday’s 42.50 per $1.
“The fundamentals will remain difficult for the US because the market is concerned how it will address the fiscal problem. On one hand, the market is looking for a better fiscal response from the government but it also knows that if it’s too tight, the economy will slow too much and it’s already slow,” said Tony Cripps, HSBC CEO for the Philippines.
Cripps said fears that the credit ratings of big European countries could also be downgraded were adding to investors’ risk aversion.
Asked whether banks were preparing contingency measures to insulate the local financial system, Bankers Association of the Philippines president Aurelio Montinola III said: “I think we’ll just observe for now. It’s hard to jump to conclusion. Markets are obviously volatile and the obvious implication is a long period of slow growth for the developed world and if that will spill over.”
Montinola, also president of Ayala-led Bank of the Philippine Islands, said the bank had over time been diversifying its holdings to include attractive Asian corporate and sovereign bonds to hedge against any volatility in US Treasuries.
“So, we don’t have too much of a problem and I suspect that many other banks are in that stage (of diversification),” he said.
Gina Goco-Morales, executive vice president at Philam Asset Management Inc., said downward volatility was expected in the next few days but with a good number of news likely to cushion the fall.
For now, she said negative sentiments were dominant amid the uncertainties brought about by the US and European debt crisis.
“It might get worse before it gets better,” she said.
“But I think it will bounce quickly too and trade at a range for a long time. So I think in fact these next few days will be a good buying opportunity. Fundamentals are strong. P/E (price to earning) ratios are at the mid-range versus Asian neighbors. Now investors will have to consider Asia as the investment haven,” she said.
Mark Angeles, head of research at First Metro Securities, said investors’ reaction to the US developments was a “bit overdone.”
“The bloodbath warrants a bounce but we keep our fingers crossed,” he said.
Banaag said the US stock market was poised to settle, if not bounce, anytime now.
“While rating agency S&P was right to downgrade the US long-term debt, the US stock market is way, way oversold. Moreover, sellers of US stocks believe that a double-dip (recession) has arrived—where the economy goes, so will the stock market,” Banaag said.
“Buyers, on the other hand, are taking their cue from what leading economic indicators are pointing to—US GDP growth will not dip but settle to around where it is at the moment, with the low probability of accelerating or improving in the third quarter,” he added.
If history repeated itself, Banaag said the US economy would not succumb to a double dip and the stock market would stabilize, if not bounce, sooner than what sellers had expected.
In fact, he said the US stock market should do better than the US economy as 45 percent of the revenues of S&P 500 companies were coming from foreign markets.
Philippine int’l credit improving
“The local stock market, along with Indonesia and Thailand, has been outperforming all other markets globally, with good reason—our international credit rating is improving, while those of the largest economies, like the US, are deteriorating,” Banaag said.
“While profit-taking by foreign funds will persist, our market will end or close higher by end-August compared or relative to today,” he predicted.
By September, Banaag said inflation in the Philippines would likely be lower than what anyone had expected, noting that the international price of oil was already 30-percent lower than its recent peak.
Interest rates, by October, may fall to another historical low.
“In turn, more cash will move to equities from fixed income, as stocks promise much higher returns,” Banaag said.
He said this was the kind of market that large institutional funds prefer when they need to deploy investible cash.
“Smart money knows that, in the near future, stock prices will be higher than where they are today. The forward PE (price to earnings ratio) of the market is now less than 12x. Historically, the index gains no less than 16 percent six months after trailing PE’s fall to this level,” he said.
A PE ratio of 12x means that buyers are paying 12 times the amount of money the stock is making for a given period.