The Second Quarter 2011 Philippine Stock Market Report

Dividend Season and “Long Term Investors” Lift the PSEi to the High Side

After a generally bearish 1Q11, the PSEi rallied late March and hovered at the 4,100 to 4,300 level in 2Q11.  On February 25, 2011, we introduced the PSEi Bands.  Go to the article, and you will see that at 3,746 that time, we recommended that investors accumulate stocks and wished them a safe flight.  Now at almost 4,300, investors that have heeded this call are probably satisfied and most likely relaxed and chilling out than investors that have bought stocks in 2Q11 when the PSEi rallied to the high end of the PSEi Bands.  Below is the PSEi’s actual performance in 1H11 compared to the PSEi Bands.

  Corpecon Research 2011F PSEi Bands Actual 1H11 PSEi
High End (Hold/Sell from Central Value) 4,336 4,344 (April 28)
Central Value 4,084 4,025
Low End (Buy up to Central Value) 3,717 3,705 (February 23 and 28)

Notes:  Actual 1H11 PSEi central value averaged from high and low end.  2011F PSEi Band central value derived before high and low end.

It’s a tad eerie but the forecast made last February is close to the PSEi’s actual performance.  The PSEi hit and exceeded our central value of 4,084 on April Fool’s Day and never went down again at that level in 2Q11.  Investors that have halted buying at that date have also gained from the market in 2Q11.

Dividend season and “long term investors” sustained the PSEi at the 4,100 to 4,300 level in 2Q11.  2Q is generally the PSE’s cash dividend season.  Despite a foreseen weaker 2011F and 2012F growth compared to 2010, there are a lot of listed companies with long term prospects.  Per sector, they are the following:

Property:  FLI’s SRP in Cebu, SMPH, SMDC, RLC, ALI and MEG’s thrust in Areas Outside Metro Manila (such as Davao, Iloilo, Baguio, others), SMPH and SMDC’s thrust in China (2013 onwards), VLL’s major three projects south of Metro Manila

Power:  AP and MER’s Subic coal plant and AP’s Davao coal plant (2014-2015), EDC’s Burgos Wind Project (Phase 1 on 2013) and Bacman (probably August 2011 and July 2012 at the latest), FGEN’s acquisition of 100% of Sta. Rita and San Lorenzo from 60% (probably end of 2011)

Food:  SMC’s MRT7 and full completion of Caticlan Intl. Airport (2015), JFC’s 4,000th store (2020)

Holding Companies:  AGI’s Hamilton and Remington hotels (2011-2012), SM’s retail store expansion, AC and JGS’ venture into power, MPI’s Harbor Link Road (2014)

Transportation and Storage:  CEB’s 37 new aircraft (2015), ICT’s India and Argentinean ports (2012)

Telecoms and Broadcasting:  TEL’s DGTL Acquisition (2H11), GMA7’s JV with MJC (2H11)

Manufacturing:  COAT’s export sales thrust (50% of sales by 2014)

Mining:  PX’s Silangan Project (2015-2016), JV with MA (2H11, probably five years time to develop), LC now profitable (2012 in our forecast but 2011 according to the company)

A lot of these prospects are long term.  Long.  This means a couple or more years, and investors were pretty excited about them at 4,100 to 4,300?  This reminds us of a joke about speculators that have bought stocks that fell or that have become stagnant.  When asked about why they bought those stocks, they didn’t admit that results fell short of their expectations and to save face, answered that they had huge hopes for the stocks they bought and were really buying for the long term.  Suddenly, these speculators became “long term investors”.  So with this, we think there is a good number of speculators among these long term investors that have buoyed the market at the 4,100 to 4,300 level.

It is our opinion that 3Q11 may be bearish.  The developments in Europe regarding Greece most likely defaulting on its foreign loans is the main time bomb we are looking at.  With this, we go to our Global Monitoring of 18 Developed and Emerging Markets.  Last time, our Top Six countries to invest in are Russia, UK, France, South Korea, Germany and Hong Kong.  Since France and Germany holds more than 60% of Greece’s foreign debt, we are bumping them down because of the impending risk.  France, to note, likewise has USD590 bn in loans to Ireland, Italy, Portugal and Spain.  These are the other countries like Greece teetering to a possible default on their foreign loans.  Our Top Six now are Russia, UK, South Korea, Hong Kong, Singapore and Brazil.  Philippines is tenth behind China, Peru and Thailand.  To rise in ranking, higher company earnings in 2011 is the key.

If Europe gets into a financial crisis which we hope will not, there are major ripples that will hit the Philippine economy and the PSEi.  Sales of the property sector will weaken as they are now strongly fueled by OFW sales.  Italy is FLI’s biggest OFW market.  The rest like it have OFWs from Europe as significant buyers of their projects.  The slowdown in business will affect ICT’s European ports, overseas Filipinos’ subscription to GMA7 and ABS’ Filipino channels, IMI’s sales and CEB’s passenger volume.  There will be some effects on the food and beverages and banking sectors as well.  What will probably be the most resilient sectors against this occurrence are the power and mining sectors.  This is an impending possibility, and most importantly, this gives less reason for the PSEi to rally to 4,900.

Why 4,900??  Well, investors and stock advisors into charting see this as a target since there is an inverted head and shoulders pattern from November 2010 to the present.  This also fuels speculation at the 4,100 to 4,300 level.  Even without the possible Euro threat, company earnings for 2011F and 2012F do not give just cause to that kind of rise and premium.  The PSEi Bands are due for an update but the central value is only seen to go up to less than 4,200.  Right now, we’re trading at 19x 2011F earnings and 53x 2011F blended multiplier.  This is pretty expensive as they are above the 16x and 24x safety marks, respectively.  Want to buy stocks at this current level??  We see danger in the air and don’t think this is advisable.  We would like investors to be able to sleep well at night.

To end on a high note, below are the performances of our funds based on value-investing.  The Wallflower Fund by the way has been liquidated already for its returns.

Pymwymi Fund

Inception Date:  January 1, 2010

Composed of 15 Stocks (Five Primary, Ten Secondary), it is Corpecon Research’s Maiden Fund

AASI Strong Buys Fund

Inception Date:  July 2010

Made for MyRA Subscriber AASI

Composed of 15 stocks with residual value purchased on July 16, 2010, it is now 48% up beating the PSEi’s 25% return from that date.

Lastly, investors who bought at 3,746 when we introduced the PSEi Bands most probably realized a 15% gain on their investments already.  That is the gain if they equally bought and held all the 30 stocks comprising the PSEi from that time to the present.  Investors who also bought at the central value of 4,084 will have a 5% gain by the end of 2Q11.  5% to 15% in just four months by just remembering three numbers or the three levels of the PSEi Bands, this is not bad.  This even excludes the cash dividends the investor reaped in 2Q11.  This is not a bad return at all.


The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.