The PSEi Forecast in 2011; Valuing the Philippine Stock Market
February 25, 2011
This really is the Big Question nowadays, isn’t it. With all the turmoil going on investors need radar to fly through…
- The Middle East tensions which affect oil prices and regional stability
- Adverse weather conditions affecting crop yields and thus food prices
- The disturbing cases of plunder against specific officials of the AFP. When you work five to seven days a week for a better life for your family and hear about the massive wealth amassed by these despicable people, you’ll really get sick to your bones. BOC, you’re next.
The PSEi has migrated south in this winter of bad news and investors need valuable guidance right now. The Big Q has been asked in previous meetings with fund managers and unfortunately they were left with less-firm and safe answers. Technical analysis still awaits confirmation, and that confirmation may be too late. PSEi forecasts based on econometric models with multiple variables such as inflation and others are debatable on the chosen variables. So, investors just wait in the sidelines instead of getting lost in the Bermuda Triangle.
The magnitude and similarities of these events, however, are not new. When faced with future uncertainty, we instinctively look to the past for guidance and answers. In 1955, in the US, the Fulbright Committee asked a finance professor to testify whether or not the Dow Jones at that time at 750 was overvalued or not. You see, the US government was very wary of signs of another Great Depression that they constantly track the Dow and the economy to immediately institute reforms or actions to prevent another financial catastrophe. The Dow was and still is a basket of 30 blue chip companies representing the US stock market (similar to our PSEi). The professor came up with a Dow value of 570. This indicates that investors were over-optimistic that time, and they were. The Dow corrected to 521, its high in 1956, and a low of 421 in 1957. It, however, had a general uptrend onwards to 1965. Groovy. This was in the past and in the US, however, it is the oldest stock market we can still learn from.
It took months for us to understand the professor’s concept and apply it to the present and to the PSEi. We also made improvements by valuing the PSEi not only with the earnings-generation capabilities of the 30 blue chips comprising it but their book values as well. The former represents income statement health and strength, the latter, the balance sheet health and strength. In contrast to forecasting the PSEi using econometric models, we prefer this concept since it stems from the heart of the PSEi, the 30 blue chips comprising it. It also uses stocks’ sister asset class, bonds. As we’ve mentioned plentiful before, there is an inverse relationship between the two. Bonds are also more stable in nature and its yields reflect and capture the events around us.
Amidst all that is happening now, our central value for the PSEi in 2011 is 4,084. The high of this band is 4,336, and its low is 3,717. On extreme ends, the best the PSEi can reach this year is 4,578, and the worse it can fall to is 3,339. We have been mentioning a lot about which stocks to buy. Now, we have a radar for investors when to buy with these bands. The PSEi is currently 3,746 as of 10:50 am today. This indicates that it is in the low vicinity of the band. Accumulation of our stock picks is recommended as of this time. Have a good flight.
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