The PSEi plunged further but made a recovery in the tail end of 3Q13. After stabilizing in July from the May drop in global stocks, the PSEi dropped further in August to a low of 5,562 on 8/28/13. This was due to investors’ anticipation of the start of QE tapering. However, foreign funds returned to the Philippines in September staging a rally in the month prior to the Fed’s surprise announcement that it will prolong QE as much as it needs to and will taper in proportion to US economic growth and recovery. The PSEi gapped up after the Fed’s announcement but succumbed to profit-taking till month end. Equities markets were rattled and dampened by issues from the US such as its debt ceiling and government shutdown. These brought down the PSEi in the last trading days of 3Q13.
Despite the gloomy US economic situation, we think a rally is already in place, and this started last September. We think that the quarter and year low of 5,562 is the last low mark from 2013 to 1Q14. In the market rally from the start of 2013 to May 2013, the peso was strong at around PHP41:USD1. When the PSEi plunged from May to August, the peso weakened from PHP40.78:USD1 on 5/8/13 to USD 44.82:USD1 on 8/28/13. This was the same day the PSEi fell to its lowest in the previous paragraph. When foreign funds returned to the Philippine stock market in September, the peso strengthened to PHP43:USD1 on 9/19/13, the day after Ben Bernanke announced that QE is here to stay. The PSEi’s performance is reflected in the peso to US dollar rate. There is a high correlation between the two, and this proves that foreign funds are the main drivers of the PSEi. Now the peso has stabilized in the PHP43:USD1 level.
Philippine equities will continue to be favored by growth-hungry foreign funds. The average cash dividend yield of our 59-stock coverage of 2.13% alone is higher than the GDP growth of US, Mexico, UK, Russia, Germany, Japan and France. Philippine GDP growth is seen by many economists to be sustained at the 7% level. This is in the same ballpark as China though economists also see a decline in China’s GDP growth. Even though the Philippine stock market is small, exposure to it makes a lot of difference in foreign funds’ equities portfolios.
What made us bullish until next year was QE remaining as long as possible. This means that the low interest rate environment will be maintained. This was the catalyst of the nine-month rally that stretched from September 2012 to May 2013 when the PSEi was continuously breaking new highs. Fear is currently in the air due to the US government shutdown, but we think this is a good buying opportunity. The PSEi is still at low levels in our PSEi Bands below its central value. Going forward from now is like the resumption of our bullishness in 1Q13. We think the PSEi PER will climb to a high of 25.58x because of the low interest rate environment. The PSEi PER will be like Japan’s 23.53 and Peru’s 22.68x, and funds will still pour into Philippine equities even in the 20x level. It’s because of the superior yields from Philippine equities whether in the form of cash dividends or share price appreciation. The 59-stock coverage is also high in value. There are only 15 expensive stocks in the coverage. 15 expensive stocks to avoid and to sell and 44 bargain and reasonably-priced premium stocks to position in for superior returns and resiliency is a good deal. This is going to be like the last rally in length and in upside.
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