December 4, 2019
Philippine Stock Market Cycles
We think the PSEi is in low levels and has been a Buy for us for one year now making this buying window one of the longest in recent times. Including the drop or the bear season of 2018, this period is indeed long. The PSEi plunged from just above 9,000 in early 2018 to just below 7,000 in 4Q18 and then just got stuck in limbo or a range of around 7,500 to 8,000 in 2019.
The last long bear season in memory is 1999 to 2004. This was after the Asian crisis, during the dot com bubble burst and the political upheaval which made Gloria Macapagal Arroyo President of the Republic replacing Joseph Estrada. It was a five-year period of continuous turbulence. Many stock market analysts changed careers that time due to lay-offs including myself.
Looking back at that period, PER swung from around 12-20x, and the margin of safety rate was negative as the PH10YTN rate was in double-digits. It was only in 2006 that the margin of safety rate became positive, and there was a rally prior to the sub-prime crisis which brought down global stock markets. The PSEi recovered in 2010 sending it all the way up for almost a decade from 2,000 to 9,000.
The period from 2013 to the present saw some bounces from the PSEi as earnings were mainly assessed for strength to justify a continuous uptrend. This was also the period year-on-year GDP growth ranged from 5-7% per quarter. This stretch and performance has not been seen for a very long time and shows that the Philippines is catching up to the rest of Southeast Asia.
Now, net foreign buying dwindled all throughout 2019. There was an economic slowdown in 1H19 which GDP growth recovered from in 3Q19. The PSEi PER is just above 18x, and the margin of safety rate is still positive. Weighted EPS growth has also been healthy even from 2018 to 2019. Why is the PSEi lackluster and can’t even break past 8,000, make it its support and stay above it?
On top of a host of reasons is the US and China trade war. Flat out, we recommend assuming there is no deal to be reached and foresee how the world and the Philippines are in this scenario 2020 onwards. We think this is a net positive for the Philippines. Still being a blade of grass among trees, but with firm roots, the Philippines and the PSEi will sway with turbulence to just being stuck in limbo in the medium term.
As a post script, we want to share below the PSEi ceilings we’ve computed throughout the years. As you can see, we became optimistic of the Philippine stock market from 2006 onwards. That is three years later and at the tail-end of the sub-prime crisis, Corpecon Research was established using the value-investing methodology. We obtained clients from June 2010 onwards and steered them through the market.
We also saw danger and informed our clients and then the public through this website and tweets about a big market reversal a couple of months before the drop from 9,000 in 2018. Our market optimism returned in 2H19 justified by the recovery of 3Q19 GDP growth from the slump of 1H19. We see GDP growth momentum and think it is worthwhile to continue positioning in PH stocks in limbo and any drops from it.
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