Going South From the Range
After rallying in 1Q14, the PSEi met the ‘roadblock” we noted in the last quarterly report and stayed in a range of 6,600 to 6,900 in 2Q14. This is actually Euphoric High levels in the PSEi Bands. Despite the slow-down of the country’s GDP growth rate to below the critical 6% mark in 1Q14 to 5.7%, the PSEi recovered from its drop to stay afloat within the range. The Philippine stock market remained attractive due to cash dividend season and the generally strong performance of the listed companies driven by the weak peso in the period. The Philippines also still has one of the best GDP growth rates in the world along with China and Malaysia.
The problem now is that the ceiling is too low. The PSEi can only rally around 200 points or 3% up to a little over 7,000. Even at this point, foreign buying has resumed. This is understandable because of the upcoming 2Q14 earnings results which commences late this month. The PSEi already went up by 15% in 1H14. It is at 21.65x as of now. Our broader 59-stock coverage already has a 19x PER as of last Friday indicating a general overheating of share price levels. Corporate earnings are catching up slowly and not yet enough to ease the PSEi PER. A good move is to “Sell on Rally” especially on overvalued stocks one already has. But the definite move is to currently minimize buying and concentrate specifically on highly undervalued stocks.
The PSEi ran up 15% already anyway in 1H14. It is best to preserve capital and gains at the Euphoric High. Speaking of gains, in a June 30, 2014 post, we listed the performance of the stock portfolios we made for our clients in October 2013 and January 2014. The best of the four is below, the High-Dividend Stocks Portfolio. We see the PSEi correcting in 3Q14. We think this commences during the next earnings season when the PSEi is more than 22x PER. That was the PSEi PER before the May meltdown in 2013.
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