First Metro Asset Management Inc

SCREAMIN’ DREAMIN’ by Gus Cosio

3:00 pm  Sunday  4 July 2010

Happy Independence Day to all you American or Fil-Am readers out there

What is bringing the Philippine market down?  Is our economy in bad shape? Are earnings of listed companies bound to decline?  Are stock prices at home more expensive than their counterparts abroad?

Last Friday, U.S. private payrolls rose a modest 83,000 in June while overall employment fell for the first time this year as thousands of temporary census jobs ended. The unemployment rate fell to 9.5 percent, the lowest level since July 2009, from 9.7 percent in May, but only because a flood of jobless workers gave up their employment search.  Weak consumer spending, housing and factory activity have heightened fears that the economy could slip back into a recession.

In Europe, the sovereign debt suspicion continues to fuel fears of global recession.  What is the average Philippine investor to do then?

Personally, I think the sentiment pendulum has already swung the other way.  Most of the smart investors have already discounted the worst for the U.S. and Europe.  You and I agree that there are no free rides.  Risk is main course for the stock trading meal.  Of course, I would not want to ignore current investor sentiment because it is the extreme cautiousness of investors that will make valuations cheaper for the stocks that we follow.  As it is, TEL is already very cheap; remember 1Q2010 profit was already Php 11 billion.  This stock is trading 11X trailing PE with dividend yield of 9% at current prices.  AP is trading 10.7X PE while its parent – AEV – is even cheaper at 8.2X.  DMC trades at 8.4X PE with dividend yield of 3% and an ROE of 25%.  BPI while looking a little expensive at 17.7X PE is yielding 6% which is better than what you would get at its own deposit counters.  FPH is ridiculously cheap that I will not even mention the PE.

Prospectively, you have companies like MER (27X), MPI (13X), SECB (8X), SCC (7X), SMDC (15X), URC (7.8X), RLC (11X), JGS (9.1X), SMPH (19X), BDO (16X) and MBT (16X), all of which are not remarkably expensive.  On the whole, this market is decently priced, and the economic backdrop is as neither as dismal as that of the U.S. nor Europe.  My take is after a little more erosion of prices, investors will start to take notice.

As a pragmatic stock investor, I would not swim against the tide either in the near term;  but I would not ignore the decoupling from the major markets that local stock prices had seen in 2Q2010.  I continue to think that the local market is growing in terms of local player participation.  On top of that, I think more and more overseas investors will recognize the decoupled move of the last quarter and recognize this market for its diversification proposition.  That is neither a pure guess nor an expression of hope.  Portfolio managers have always been on the look out for diversification opportunities; and when they look at their Bloomberg and Reuters analytics screens, the PSEi will come out screaming back at them.

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First Metro Asset Management Inc