First Metro Asset Management Inc

COULD WE BE UNDERVALUED?

10:05 am  Wednesday 7 October 2009  Philippine Stock Exchange Index   2930.80

In these first few days of October, our market has gone to an index low of 2771 to a high of 2884, which was yesterday’s close.  The swings were either strongly affected by Wall Street or regional markets.  Left to domestic factors alone, we should have tanked a lot more given the natural disasters the country has been having.  Economists have been saying that the recent and even on-going typhoon damage will cut anywhere from 0.1% to 0.4% in GDP for the next quarter.

In the global markets, the idea that market players were worried about was the “October jinx,” which is the historical experience that market crashes in the past happened in the month of October.  What it was suggesting was that investors ought to be cautious during this historically unpredictable month.  This leads me to believe that investors in the major markets are indeed being very cautious.  Earlier today, I had read an article from a U.S. fund manager who still thinks that the Dow could drop to 6500.  It closed 9731 overnight.  Of course there are the bullish investors out there who continue to add to their equity portfolio.  I am not one to think that these are people who are recklessly buying giving no thought to the possibility that stock prices could crash in the coming weeks for reasons that would be totally unexpected.

Locally, we’re seeing our currency strengthening against the U.S. dollar trading at 46.60 in spite of the ravages of nature that might even cause the government and private business to draw on their reserve funds to reconstruct all this damage.  What is really going on?  Is this insanity that the markets are  totally ignoring factors that should be dampening asset prices?  For sure, property prices in many areas of Metro Manila have tanked terribly because of flood damage and the neighborhoods’ susceptibility to flooding.  The wealth effect is trending toward the negative which implies that asset prices should be falling.

Can we expect prices of other asset classes to rise, then?  I think on a sector by sector, there will be positive and negative developments.  For banks, there could be problems on collateral values on existing mortgages.  There could also be a resurgence of loan demand for new developments to bring about net gains.  For consumer stocks, people will be re-stocking their pantries, buying new linen, replacing damaged furniture and appliances.  For telcos, there could be greater usage of wireless protocols in both voice and internet applications which have higher value added.  On the negative side, there could be a lot of damage to the existing cables in flooded areas.  The expectation train goes on.

I think the bottom line is earnings.  We cannot escape the fundamentals.  What the market is telling us today is that we have undervalued stock like TEL, GLO and MBT over the past few weeks.  I think we’ll discover that even large stocks like AC, SM, SMPH, and even MER will be rated higher despite the negative economic undertone prevailing.  We could be in a situation that everything has remained undervalued with respect to the earnings that these companies generate on a sustained basis.

I think that we can conclude that there is good reason to keep involved in the market.  I would be careful chasing prices.  I would keep to stocks that I am very comfortable with even if they are the small caps like ISM, WEB, SPH or EEI.  If  investors want to punt stocks, be sure that these issues have good fundamentals because at the end of the day, whatever the economy does, if a company delivers a good bottom line, it is a good stock to be in.

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First Metro Asset Management Inc