Philippine Stock Market Research

Sell In May and Go Away?

April 15, 2015

This week’s PSEi meltdown reminds us of the traders’ favorite tune of “sell in May and go away”. This originated from observations from US traders that the months of May to October are the most volatile and are generally bearish. It’s still April, but May is right around the corner.

However, if you did follow that tune in the Philippine stock market since 2009 (when we started stocks research), you would have been only right just one time in 2013. Please look at the table below.

Sell in May & Go Away

PSEi’s weighed down for many reasons.

One is global economic slowdown which waters down PEG. In just a quick rundown of the planet’s growth drivers, the US, French, Chinese and Indian latest YoY GDP growth rates are flat to down. Germany and the Philippines are up, but two out of six components of this sample does not bode well going forward. We, however, think that the Philippine economy will do better this year because 1Q14 was affected by typhoon Yolanda. This gives 2014 a lower base for 2015 with its weak peso and lower fuel prices to shine. Philippine economic performance is also the pillar to which market downturns like what we are seeing now should be viewed as opportunities to invest in Philippine stocks rather than avoid them.

Second is the PSEi PER has been above 20x since March 2014. This is the longest stretch since the PSEi’s inception in 1994. Something’s got to give in this heightened state. Only strong corporate earnings of the PSEi components will ease the PSEi PER.

Third is that interest rates are creeping up. Our barometer for this is the PH10YTN rate. Since the start of 2015, it has gone up by 25 bps to 4.113%. We observed this shooting up above 4% after the Mamasapano clash which brought out public dissatisfaction with the Aquino administration. Being inversely related with a correlation of -89%, when the PH10YTN rate is up, the PSEi is going to be down. With the US raising interest rates later on, we don’t see the PH10YTN rate going down in the medium term.

Fourth is the presidential elections is next year already. Conservative investors will most likely shy away from the Philippine stock market with this shift in power taking place. Is it going to be for the good of the country or a tumultuous six years ahead? Poe or Binay? Manny Pacquiao? Only God knows.

Fifth is China’s build-up of artificial islands in the West Philippine Sea. This is stirring up potential conflict between it, its neighbors and its neighbors’ big allies. We think this is the biggest concern going forward from 2015.

These reasons, we already know by heart from repetitions in our Philippine stock market advisories.

The biggest question for us though is why did the PSEi sustain a PER of above 20x for 14 months since March 2014? All that buying just ceased and eased briefly, and the bulls just kept on coming.

This is not a total mystery though. Our market direction tool, the PSEi Tracker, last November to December 2013 were at its highest since October 2008 to February 2009. Yep, that’s right. November to December 2013 was after the PSEi meltdown caused by the May US Fed taper tantrum and before the PSEi rally from 6,000 to 8,000 last week. Similarly, October 2008 to February 2009 was the tail-end of the global financial crisis and before the PSEi rally from 2,000 to 7,000 in April 2014. (Please see the table again above.)

Apparently, the PSEi Tracker is some kind of bow and arrow. Fully extended, it can release a powerful force that can send the arrow hurtling over a long distance. Right now, it is 0.30%. It’s almost not extended at all. What can extend this is a lower PSEi PER and PH10YTN rate.


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.