First Metro Asset Management Inc

FOREBOADING PSYCHOLOGY? by Gus Cosio

2:50pm Sunday 22 August 2010 Philippine Stock Exchange Index 3593.60 (Friday close)

The DJIA appears to be sagging as global investors are looking less at the stock prices which benefited from strong 2Q2010 earnings report to recent economic figures indicating weakness ahead for the economy.  One insight I got while reading the weak US jobless figures and an article on new US healthcare legislation is the disincentive for employers to hire new employees because of the burden of healthcare on employee cost.  It is not surprising that companies whose earnings are very strong are not tapping the job market fast enough.  The broader based S&P 500 is showing the same weakness and looks to be headed for further weakness if one considers technical indicators.

The PSEi on the other hand paints a different picture.  The technical indicators are showing underlying strength supported by positive macroeconomic fundamentals.  The latest OFW remittance report was an increase of 8.3%.  Remittances are a leading indicator because it presages a growth in consumer spending in coming months. The aggregate of beneficiaries effectively have effectively 8.3% more money to pump into the economy.  Of course, there is also the seasonal harvest in rice producing areas which bring more purchasing power into the countryside.  The GDP growth rate to be released on Thursday, the 26th, will likely reflect the underlying economic strength.  The scuttlebutt from brokers covering foreign funds is that appetite for Philippine stocks have grown bigger.  This is but natural since asset allocation into Asia ex-Japan has grown in leaps and bounds. Even if only 1% gets allocated into Philippine shares, that could be around US$1 billion coming into local stocks.  Value turnover has straddled the Php5 billion mark over the past week giving hint of added foreign money.

If you compare the PSEi to the MSCI Asia ex Japan, we have been outperforming the rest of Asia in the current quarter.  It is not unreasonable to think that more foreign and local capital will flow this way in the current quarter.  The large blue chips will be the most likely targets of foreign buyers.  This to me explains why in spite of JFC being expensive, had outperformed the PSEi for most of the current quarter.  JFC is a pure consumer play which reflects discretionary spending in the economy.  It also partly explains the strength of URC earnings as well as sustained revenue stream for TEL.  My take is that for the coming weeks URC and TEL will likely have strong buying support.

There have been questions about JGS, whether or not it is a good stock to buy.  Fundamentally, I would say categorically that it is an excellent company which has excellent companies in its portfolio, namely, URC, RLC, unlisted Cebu Pacific and Robinson Savings Bank, as well as companies obscure to many of us.  It also owns DGTL which has taken more than 15 years to turn around, but the recovery of the company already looks imminent.  The only problem of JGS is the stigma in the market that Big John, all these years, has not shown any concern for shareholders.  My opinion, however, is with what has gone about in RLC and URC over the past 18 months, the impression about Big John may be worth changing.  JGS should be able to trade properly in the months ahead due to good fortune in URC and RLC and possibly the favorable conditions for DGTL and an IPO for Cebu Pacific.  Will one lose money in trading JGS?  It would really depend on your timing.  Don’t forget GLO was such a good story last year, but look at where it is now.

In spite of the bad fortunes in GLO, AC looks to be a stock that foreign funds are buying simply because it gives them simultaneous exposure to the banking, communications and property sector in one go.  Such a psychology will bode well for stocks like AEV, DMC and MPI all of which have exposure to more than one industry sector.  That should also be good for MBT because of its universal bank status which has allowed it to have exposure in the power (Global Power), property (Federal land), insurance (AXA and Charter) and automotive (Toyota) industries.

The main story that investors are seeing is the strength of the underlying economy which is very different from the double dipping US situation.  Are we decoupling again? Compare both indices from the beginning of July and see for yourself.

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First Metro Asset Management Inc