The Big Bounce
After falling in the first month of the year, the PSEi and global equities recovered from February to March 2016. This was caused by the recovery of crude oil prices from the USD30 per barrel level to the USD40 per barrel level, QE from the Euro-zone and the recovery of the US economy. The US Federal Reserve likewise took another dovish stance on raising interest rates this year.
In late January, our research noticed a couple of things from what we track and called a bottom for our clients. One is that market cap to GNI fell to 75% on January 22, 2016. Second is that the average corporate bond yields suddenly fell for two consecutive weeks after rising for five weeks. Both and especially the former indicated a buying window that would eventually send the PSEi from the depths of 6,000 back to the 7,000 level.
The SMC group of companies became the star performers in 1Q16. SMC surged by 50%, PCOR by 40% and PF by almost 40%. At the PSEi’s drop, SMC was trading below cash per share, and PCOR and PF were and are still trading significantly below their respective Estimated Liquidation Values (ELV). SMC and PCOR are highly leveraged companies as they used debt to fund PCOR’s RMP-2 program which was completed in the end of 2015. This enabled the company to produce environmentally-friendly high-margin fuels and significantly offset the adverse effect of falling crude oil prices on PCOR’s earnings. PF was an overlooked market leader in food and beverages, a stock which we have strongly recommended since 2012. It is SMC’s bright spot with minimal debt, market dominance and cost-efficiencies. PF pays quarterly cash dividends of PHP1.20 per share, and its yield turned superior when PF fell to PHP114 per share when the PSEi dropped in January 2016. We still strongly recommend PF and see crude oil price movements dominating SMC and PCOR’s share price in 2016.
With 1Q16 over, what is in store for 2Q16? The presidential elections take center-stage this May. Either Davao Mayor Rodrigo Duterte or Senator Grace Poe may end up being the Philippine president in 2016. We think this is a favorable outcome but lean more towards Duterte to clean up corruption that is tearing the country apart.
Just before closing 1Q16, USD81 mn stolen by hackers from the Central Bank of Bangladesh ended up in the Philippines through RCBC, Philrem and Solaire Resort and Casino. This is a big blow to the reputation of Philippine banks. When this issue surfaced, the PH10YTN rate surged to near 5% from only 3.80% indicating a sell-down of the notes.
This easily puts our 2Q16 outlook for a market correction. We will be keen on spotting the bottom again for another good run in 2016.
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