The Fourth Quarter 2012 Philippine Stock Market Report

PSEi 6,000

The grand finale foreseen in 3Q12 occurred in 4Q12 as the PSEi reached the 5,800 level for the first time.  Two decreases in the Philippine Ten-Year T-Note (PTYTN) in July 31 and September 11, 2012 prompted us to call in 3Q12 that the PSEi will reach our PSEi Band Euphoric High level of 5,741.  Another decrease in the PTYTN in December 4, 2012 to its lowest rate ever of 4.046% fuelled the PSEi’s rise to the 5,800 level.  2012 was a good year as the PSEi registered a return of 32.95%.

PSEi 4Q12

The PSEi is seen to remain strong in early 2013 with the potential of reaching almost 6,800.  However, we are not robots that just plug in figures into our model and conclude that whatever resulting figure is PSEi for the year.

Three main factors point that the market’s strength may not be sustainable throughout the year.  First, the PSEi is already very expensive at 19.38x ttm PER.  Of our sample of 18 developed and emerging markets worldwide, the PSEi is the third most expensive market behind Japan and Brazil.  In the start of 2012, the PSEi was at 13.50x ttm PER.  That’s a big difference.

Second, 2012 earnings were spectacular on the average because the food and beverages sector started beaten down in the start of 2012 from high raw material prices in 2011 and then recovered.  We may be coming from a high base in 2013.  In the property market alone, the property bubble burst in the residential high-rise market segment of P1-2 mn per unit.  In mining, mining giant PX will still rehabilitate its Padcal mine in 1H13.

Third, last and similar to the first point, the possible end of QE and a favorable resolution of the remaining fiscal cliff issues in the US may prompt foreign funds to go back to the US market from the emerging markets.  This possible pull-out can douse the PSEi’s 2013 rise.  Of the three factors, the first is fact and the other two are strong arguments.

So what do we do in 2013?  Be wary of expensive stocks.  Sell them, and take refuge in value stocks.  The Philippine economic growth story is for real and in the long term.  Any market correction is a welcome opportunity to take good position in whatever fundamentally-sound expensive stock that falls to bargain levels.  We think 2013 will be like a 2011 when the PSEi underwent volatility and ended the year with a 4% return from its start.  The volatility though in 2013 will be more on a downside basis.

Coming from a euphoric 2012, this may sound bad to a lot of investors and especially traders.  Investing, however, is not about heart.  It’s about knowing the situation and playing defense as well as offense.  Defense is preservation of capital, while offense is about positioning well for superior growth.  Remember that the market is there to serve us rather than us acting as its herd.  The golden opportunity to grow our funds is always there whatever the market situation is.

After being eerily accurate in 2011, the PSEi Bands’ reliability was just ok in 2012.  The central value proved to be the PSEi’s low and the euphoric high was a good target but was breached during the year.  The start of the use of PSEi Sub-bands was also helpful in 2012.  Foreign funds flooded the PSEi stocks in 2012 limiting the PSEi Bands’ accuracy.  The 2013 PSEi Bands central value is seen at 6,006 with the high and low at 6,400 and 5,611, respectively.  The 2013 euphoric high and depressed low are seen at 6,794 and 5,217, respectively.

We’ve been making equities portfolios for three years now, and even though the work is hard, we’re proud of the results below.  It can be done, and we wish everyone a Prosperous ’13.

Corpecon Funds 2010 to 2012

Disclaimer

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.