QE <, PH10YTN >, PSEi <, BP >>>>>!#@!:-(*_*hmph
The PSEi was happily trekking towards the euphoric high target of 8,000 in the first part of 2Q13. It went as high as 7,404 in May 15 until Fed Chairman Ben Bernanke announced that the Fed may taper QE as the US economy shows signs of recovery. With that short announcement, global equities markets dropped including the high-flying PSEi. From its peak, the PSEi shed 1,725 points in one month and one week bringing down the PSEi PER from a high of 22x to 17.5x. That temporarily allayed the complaints of the media and big local and foreign funds that the PSEi is expensive. It also left the blood pressures of traders and newbie “investors” up and volatile. The magnitude of the effect was huge because it strikes the very heart of the prosperity the PSEi and the Philippine economy established in 2013, “a low interest rate environment”. It seems that this prosperity has a caveat, a small footnote or consequence at the bottom of the label. “Rx: Product enhances wellness as long as QE is maintained.” The tail-end of the PSEi graph below shows a three-day recovery. This, however, is just window-dressing for the first semester end of 2013.
So when QE is tapered or ends, interest rates from the US to the Philippines go up. When they do, equities go down and blood pressures go up as seen in our algo title. (Just getting into the times and to be cool, nobody says formula nowadays but algorithm or algo. It is a “calculation procedure”, but of course, our title is just a mock-up algo). Another effect of QE is that when it is tapered or ends, and interest rates go up, analysts’ fair values of equities go down. How down? Analysts have different CAPM assumptions, the heart of their fair values, so we don’t know exactly how down. For us, it’s negative 3% on the average, but to others, it may be negative 30% because that’s how big the PSEi shed from the peak to the through in 2Q13. The drop, by the way, was fueled or exacerbated by fear and panic also. Philippine fixed-income securities and equities have a negative 77% correlation in 120 numbers of observations. In May 2013, it was negative 50%.
So the big question now is where do we go from here? One thing going for the Philippines and the PSEi is growth. That is GNP > & EPS >. That must be put in our algo (cool). 1Q13 GDP growth was 7.8% besting China’s 7.7%. A Thomasian economist said that if the Philippines sustain a GDP growth rate of at least 6% every quarter for ten years, the Philippines will become an NIC just like what happened to Singapore and Korea. That’s around eight more years. Still far but running strong like downloading a season of a favorite TV show. Also, 1Q13 YoY recurring EPS growth of our 57-stock coverage is a massive 34%. This brings down PER addressing the media and big local and foreign funds’ concerns that the PSEi is so expensive. Of course, with interest rates going up due to QE tapering, growth may slow down. However, growth is above average and above expected levels that the economy and equities have buffer to still perform well in a “normalization” of interest rates. Good thing that the Philippines have growth. In Europe, the US and other countries, growth is a rare animal like a Tasmanian wolf that is said to be extinct but is still seen by hikers and farmers. Good thing it’s not a dodo which is really extinct.
So with growth in the equation taking into account the caveat or the footnote at the bottom of the wellness product label, the adjusted PSEi Bands is at a level lower than our PSEi Bands as of February 2013. To provide margin of safety for our MyRA subscribers, the new PSEi Bands are also adjusting according to the US10YTN on a weekly basis. This gives them the guidance whether the PSEi is already low to buy or high to stop buying.
What stocks do we buy? Of course we buy value stocks. By value, we mean upside, not premium. They are stocks with minimal or no debt, have hefty returns on invested capital, undervalued and may even be unpopular or not well-known. What about stocks bought in 1H13 with paper losses? Keep them. Value-investing is continuous and in our case a monthly practice. The averaging down of value stocks acquired in 1H13 especially in today’s prices and growth will prove very beneficial in the PSEi recovery.
What about the PSEi at 8,000? The rug may be pulled off our feet by QE tapering, but it is still a visible target as long as GNP > & EPS > are in our algo. What is essential right now and in the period of QE tapering (estimated from 2013 to 2015) is margin of safety. This is for investors to produce favorable yields from equities even though the market is discombobulated and in doldrums.
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