Please refer to the First and Second Quarter 2011 Philippine Stock Market Reports and the Philippine Stock Market Research Report for Febraury 25, 2011 for a proper background to the Third Quarter 2011 Philippine Stock Market Report.
After hovering at the 4,200 to 4,300 level in 2Q11, the PSEi rallied to a euphoric high in 3Q11 before faltering and dropping back to February 2011 levels. The rally to a high of 4,563.65 on August 2, 2011 was fuelled by ultra-optimistic PSEi projections by some local stockbrokers and the idea that there will be a shift of funds from debt-riddled US and Europe towards Asian emerging economies which the Philippines will be a beneficiary of. The magnitude of the effects of the sovereign debt crisis in the US and Europe then sank in to investors, and the PSEi dropped from jolly July to somber September in 3Q11. There was a mild rally though in late September that ended 3Q11 with an upward spike.
The levels to which the PSEi climbed in 2Q11 was already worrying given the high valuation of the Philippine Stock Market amidst brewing problems abroad. When the pipers played a pretty tune for yearend 2011 and 2012, the pack followed raising alarm bells on our end as the PSEi went to euphoric highs of 16x PER and 3x PBV for a blended multiplier of 48x in July 2011. 48x is double the 24x safety mark by the way separating bargains and premium stocks. You know the problem with the Philippine Stock Market compared to other countries is its expensive balance sheet rather than its profitability. This makes us overall expensive. Indonesia also has this same problem. It just made no sense for the PSEi to summit to the 4,500 level in early August. Forget about Greece defaulting on its debts. It’s the 27th biggest economy in the world. If Italy, the 8th biggest economy on this rock, defaults, that will certainly shake the global economy again. Still the PSEi remained at the 4,300 to 4,400 level in August and September until reality set in. We also think that the mild rally at the tail-end of September is an effect of immediate bargain-hunting and quarter’s end window-dressing. Institutional Funds might have already cashed in on the Philippine Stock Market for 2011 as early as September given the risks in the US and Europe. 4Q11 might just be a wait-and-see quarter for these funds to see what to do for 2012. That is certainly not a bad idea given the general situation.
We are happy to have resurrected our doomed project and made it work in February 2011. The PSEi Bands continued to guide us and investors amidst these turbulent times. Because of the bands, we recognized that the PSEi was already at high to euphoric levels from 2Q11 to most of 3Q11. The 3Q11 high of 4,563.65 is actually near our PSEi Band’s euphoric high of 4,578 for 2011. Remember that tad eerie feeling of accuracy between the actual PSEi and the PSEi Bands in the Second Quarter Philippine Stock Market Report? It still rules in 3Q11. When the PSEi disintegrated in September, it went to a low of 3,715.01 on September 26, 2011. That is again near the low end of the PSEi Band of 3,717. Actual PSEi bounced from that low to end at 3,999.65 in 3Q11. That is just below our central value for 2011 of 4,084. If investors heeded the advice of the PSEi Bands, they would have already made a return of 31% from an equal investment in the 30 basket of stocks comprising the PSEi in 9M11. That is if the investors bought at 3,705 when we introduced the PSEi Bands, sold at the 4,500 level, the euphoric market high, and re-invested their funds at the 3,700 level when the PSEi dropped.
|Corpecon Research 2011F PSEi Bands||Actual 9M11 PSEi|
|Euphoric High (Hold/Sell from Central Value)||4,578||4,564 (August 2, 2011)|
|High End (Hold/Sell from Central Value)||4,336||4,344 (April 28)|
|Central Value||4,084||4,025 (April 1)|
|Low End (Buy up to Central Value)||3,717||3,705 (February 23 and 28)|
|Depressed Market (Buy up to Central Value)||3,339||PSEi has not gone to depressed levels in 2011|
Notes: Introduced and Documented on February 25, 2011
So what do we see now in 4Q11?? Well, the PSEi just ended just below our central value for 2011 signifying a small buying window. We have another tool that signals market run-ups or declines called the PSEi Tracking. It has passed back-tests, but going forward, the battleground has changed. The PSEi Tracking will be under an acid test this 4Q11 because of one factor. The risk premium that we use as the basis of our research has expanded considerably from 1.55% in May 2011 to 2.86% in September 2011. This means it might take higher company earnings, bigger market discount and stronger flight to safety to less-risky asset classes to spur a Philippine Stock Market rally. This simply means that the PSEi might be generally weak in 4Q11. There are less reasons for a rally back to 4,000 to 4,500. In a recent update of conservative 2012 forecasts, the average net income growth of 45 stocks is now 15% from 24%. The global picture still doesn’t look encouraging as well, and it is advisable to retreat to the low ends of the bands for buying opportunities and locking on gains as early as the central value if need be.
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.