8:30am   Monday  24 August 2009   Philippine Stock Exchange Index  2720.18 (Thursday close)

Positive growth in Japan, Germany and France. Existing home sales in the U.S. up 7.2% in July – its fourth consecutive months.  Central bankers from around the world gathered in Jackson Hole, Wyoming expressing confidence that the worst of the financial crisis was over and that a global economic recovery was beginning to take shape.

It looks like the world’s major economies are over the hump and Wall streets cheered with major indices pushing to their highest close in 2009.  There is no more doubt that we are in the middle of a bull market as far as the major markets are concerned.

But wait a minute, we’ve been riding the bull for almost five months now, even before signs of recovery even showed up.   The bull is no longer a stranger.  As a matter of fact, the Shanghai market which had gone up over 70% at its peak is now almost 20% below that peak.  As a matter of fact, China’s central bank is now looking to tighten the credit situation because they think that too much money had gone into stock trading.  They are in fact saying that everything to this point had been a liquidity driven move in the market.  It is a situation where the market predicted the recovery which is what usually happens after a recession.

Let’s look at the Philippine scenario.  This market bottomed out in March when the index hit a low of 1745 on 17 March 2009.  Ever since then, we’ve seen a high at 2887 on 4 August 2009.  That was more than a 60% recovery.  In fact, it is safe to say that we’ve erased all the anxiety that was poured upon this market by the financial crisis of 2008.  In fact, we had breached the levels seen in August 2008 when the final signs of the crisis were finally unfolding.

What am I trying to say?

Thee move from March to early August should be viewed as almost a complete recovery of the Philippine market.  We had come from very cheap levels and, naturally, we could not stay there.  The theme that the market has been playing on these past months was the extreme value for money that a lot of the familiar stocks had to offer.  We were seeing close to double digit dividend yields on some of these blue chips early in the rally and it was no surprise that investors piled them all in.  The question now is whether people still have room for these stocks at these prices, hence the need to be more discriminating in selecting assets.

The funny thing is that the local central bank did not really pump money into the system.  Any excess liquidity created was on account of inward flows coming from foreign remittances from both OFW and private wealth of resident Filipinos.  As a matter of fact, some independent statistical measures might even show that the central bank tightened during the past few months.

As investors in the local market, we should try to digest these developments so that price movements of financial assets can make sense to us.  My fearless forecast is that interest rates will remain stable at these current historically low levels because money is available without much help from the BSP.  Economic activity will likely move better because the major economies are feeling more upbeat and domestic exports and tourism can start to pick up.  Finally, government would be quicker to spend in the final months of the year because the fiscal deficit will not appear to difficult to manage now that the world is out of recession.  In a sense, asset prices do not look to be expensive yet especially in relation to interest rates.

Can we still ride the bull market?  I think we should, but with the thought that it won’t be a ride in the park.  The market will not hand us profits on a silver platter.  It is time to do more homework, and I hope I’ve put things in perspective for this week that lies ahead.


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