First Metro Asset Management Inc

Greece or grease by Gus Cosio

After hitting an all time high on intra-day trading, the market pulled back a bit on profit taking but had a strong close nevertheless. Most banks were bid very strongly at the close with SECB gaining the most followed by MBT , UBP and BPI. BDO and PNB lagged the market but PNB was strong at the close with bids accumulating around 62.80. I still think that PNB will be a no-brainer until the sock price hits just below 70.

The cut in reserve requirement presages stronger net interest margins down the road provided banks are able to increase their loan portfolios. Around Php 120 billion will be released into the system as a result of the 3% cut in reserve requirement. This will encourage banks to lend more by way of mortgages and home loans since these are the most profitable yet least risky among their list of financing products. I think property stocks will benefit from the reduction in reserve requirement. Banks will surely be more open to real estate loans which are in fact stable and high yielding. I think SMDC, which came down strongly on real estate jitters late in 2011, will recover quickly when investors realize that take up of its projects remain at the same pace as early 2011. I also think that ALI, SMPH and RLC which have a good amount of commercial space for lease will benefit from the low interest rate and easier money regime. I also think that this move in monetary policy and the government’s drive for larger infrastructure expenditures should fuel greater consumer spending which benefits the likes of PGOLD and TDY.

One exciting prospect is the not so popular oil sector although some oil stocks have been gaining investor attraction. The hurdle with oil stock investments is the high risk character of the enterprise since oil companies listed in the PSE are usually exploration companies which have prospects of high returns if they strike black gold. Of late, some activity has come into OV which over the past 7 trading days saw cumulative value turn over of Php 500 million. There are a few oil stocks that seem to be worth looking at aside from OV, namely PXP and OPM. The reason I am inclined to look at OV is because it has paid regular dividends for a few years coming from its share in the oil production of the Galoc and West Linapacan fields.

Investing in oil stocks is not for the faint of heart. It is a high risk high reward situation, but it has a place in a well diversified portfolio. In short, it is for those with a large enough portfolio such that if you lose some money on it, you will not feel it so much. Are high risk propositions within the purview of sound investing? I think so. The spectrum for those who understand risk should be wide and the longer and wider an investor gets involved in the market, the better his or her understanding of the risk involved. For me, a concrete example is ORE which many considered as speculative a year or two ago; but when it started to produce and ship out the product, it presented real value. Remember that in natural resources, the bottom line of value is the resource base. We could say the same for NI; and in both cases – ORE and NI – the value showed up in the share price because eventually institutional investors took notice.

Anyway, judging from the behavior of the global markets overnight, some anxiety has made its way into developed markets again. Greece continues to be a concern and a possible Israel-Iran conflict looms. Anxious investors are slowly paring down positions although not aggressively. As far as Greece is concerned, I think political leaders in the country recognize that the medicine for their situation will be hard to swallow, but they continue to negotiate with the unions to arrive at a consensus acceptable to both the local population and the international financing institutions who will lend extend financial support. I think the Greeks realize that mending their ways is the only way out of this hole. As to Iran, the best gauge of the severity of this crisis is the price of oil. Since oil futures remain steady, I think both sides are careful not to bring this to a head with of course the backing of the U.S.

As for the Philippine stock market, I think a consolidation due to international tensions should be a healthy move. After all, Philippine fundamentals from both macro and company levels remain constructive. Even now, inflation was reported lower at 3.9% for January although it is no guaranty that it will stay there, but if oil prices move higher, it may even be a boon for a stock like OV. Could it be a good hedge for inflation? Only time will tell.

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First Metro Asset Management Inc