First Metro Asset Management Inc


10:15 am Tuesday 18 May 2010   Philippine Stock Exchange Index 3266.20 down 27 pts

With the global markets becoming more volatile, it is very probable that the same instability in the markets could come to local stocks. Just to put things straight, the troubles in the global financial markets are not arising from companies going bad but from sovereign states losing control over their finances. Actually, the situation in Europe have very strong fundamental undertones wherein sovereign states agreed to conform to specific macroeconomic limitations which not only they did not live up to, they even fudged up their figures to pretend that they did.  That is why the Greek problem simply cannot go away.

When the Europeans crafted the Euro as a common currency, they gave themselves a 10 year head start in order to give individual governments a chance to strengthen their respective domestic economies.  The agreement was that member countries would bring their economies into balance of payments and fiscal positions of inside +3/-3%  of GDP.  Furthermore, inflation should be inside of 3% in these years preceding the creation of the common currency.  The continuing sovereign commitment was to keep the macroeconomic targets within these conditions.

All that is history now.  Greece has gone way out of the playing field as they continued to pursue populist policies.  You cannot keep your fiscal and trade balance if you coddle your population and grant entitlements that they cannot pay for.  That is true for any government.  That is why communism fell in the late 1980′s, and that is why China while avowedly communist has been pursuing very market responsive (read capitalist) economic strategies.  They have been persistent in maintaining surpluses in both fiscal and balance of payment positions.  At the end of the day, when both positions are in balance, the economy will be able to hold its own.

In this country, we are fortunate that while our fiscal position is in deficit and is expected to be in that position for at least 2 more years, our current account and balance of payments are in surplus.  Furthermore, our government’s foreign debt as a percentage of GDP is only around 15% of GDP compared to around 120% of GDP in Greece.

The question is whether or not our market will be badly hit if global volaitlity continues.  I think that we are being affected already.  In spite of good results that have been disclosed, our market has not really forged ahead in proper proportion.   AP, AEV, DMC, MBT and PNB reported earnings that were reasonably strong.  I think these shares will be well underpinned by their full year earnings prospect.

The disappointing results came from AC whose 1Q10 net profit slid by 2% to Php2.11bn.  The decline was due to an 8% Y/Y reduction in equity earnings from core businesses –  BPI’s income  declined 5% Y/Y and Globe’s dropped 26% Y/Y.

I would recommend that if you hold AC, BPI, GLO and MWC to sell these and look to switch into the stronger stocks.  I would sell MWC and buy DMC.  I would get rid of my AC and buy MBT.  I would sell GLO and perhaps split the proceeds between TEL and DGTL because in my impression PLDT has managed to keep its market share while Globe has lost some of theirs to Sun.

I would also use the market’s weakness to put cash into these same companies.  I would not be in too much of a hurry to build up positions because I think that aside from the weakness of global equities, the domestic market will have some jitters because of the rumblings in the political arena.  I do not look to kindly to congress moving the presidential proclamation to June 4 from May 30.  I do not see why they did not even move it earlier.

For those who do not have the time nor the patience to wait for this market to turn, may I suggest that you consider putting some money in an equity mutual fund.  In a mutual fund, the fund manager is always following the market which means that your money will be there for the ride when the market surges again.

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First Metro Asset Management Inc