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The “Sell in May“ phenomenon seems to have lived up to its name. After closing at an all-time high level of 8,127.48 in April 10, the PSE index has fallen by as much as 7.7% to a low of 7,505.03 in May 28. But more than the seasonality effect, the correction could be attributed to the following factors:

– Premium valuation for the PSEi could not hold as 1Q15 earnings results were pedestrian and mostly in-line. The PSEi at the 8,000 level was trading at 20x forward PE and it needed much better earnings results to sustain the elevated valuation levels.

– 1Q GDP growth came in at 5.2% year-on-year, way below market expectation of 6.6%. The main drags were slower growth in government spending and wider net exports deficit. In addition, the consumption boost that was expected due to low oil prices and inflation in 1Q15 did not seem to have had a significant impact on spending.

What should investors do:

– First of all, do not panic. The short-term headwinds would not change the long-term fundamental outlook for the Philippines. Though there could be some scope for downward revision on economic growth and corporate earnings growth, we reiterate our long-term bullish view on the Philippine economy and the market.

– In fact, this correction should be considered as a window of opportunity to buy shares at cheaper prices. This is a perfect time for our existing investors to peso-cost average and an excellent entry point for those who have been waiting in the sidelines.

How are the funds positioned?

– We recognize the potential volatilities that may arise due to the factors mentioned above and other external developments such as the anticipation of a US Fed rate hike. As a result, we have taken profits and reduced our equity exposures for SALEF and SALBF respectively. We will re-deploy the cash and employ selective bargain hunting during market selloffs.

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