AGAIN IN PERSPECTIVE
9:00pm Thursday 20 May 2010 Philippine Stock Exchange Index 3222.19 (-1.32%) I would like to put some perspective on the local market moves. we have been buffeted by events which have all been external in nature. Just recall the relief rally that the market saw last week after we had a very convincing elections which for the first time had been automated. We were encouraged by the swiftness of the results. What impressed me more was the early conceding of Manny Villar who was a very strong contender in the last polls. The act was further supported by the rest of the losing candidates likewise conceding. Only Erap, who probably has very little comprehension of the science of statistics and information technology, has not conceded. If the European sovereign debt scare were not around, we would probably be seeing a stronger market. Unfortunately, the greater majority of investors have very little understanding of the situation in Greece and would rather take profits rather than risk losing. I have no argument with that. Last week, we saw a single day low in the DJIA which sent the index to a 996 points intra-day drop. At first, it was thought that it was a computer glitch; but when the dust had settled, authorities realized that there was really some massive selling in what is known to be the dark pools of liquidity. These are private trading platforms in developed markets where very large trades go through and eventually mapped in the formal exchanges after the trade. I think the selling was sparked by fears coming from the debt crisis in Greece. In a post-election forum on Tuesday, economist Dr. Bernardo Villegas said the debt problem in Portugal, Ireland, Italy, Greece and Spain could spill over and cause another recession in the United States and Europe and, should it occur, will cause a slump in Philippine exports. “Things are looking rosy in 2010, that’s why exports rose by more than 40% in the first semester. But I’m warning the new government next year may not look as rosy,” Dr. Bernardo said. There may be some difficulties ahead in global trade, but there are also positive signs that these stumbling blocks to growth are being mitigated. Yesterday, Applied Materials (AMAT) of the U.S. reported results that exceeded analysts expectations. I think this is very significant especially to a semi-conductor manufacturing country like the Philippines. AMAT is the largest supplier of manufacturing systems and related services to the global semiconductor industry. It is a grandfather company to the electronics market, therefore, its strong recovery presages a strong recovery in the global electronics market. That will be good for Philippine exports and will fuel some consumer spending in the country. So there is a growing opinion that Europe may affect the real economy because of our level of exports. While I think our exporters should be cautious, other indicators do not fully support this particular expectation. As a market practitioner, I think that it is merely the relative value of assets between Europe and Asia that investors will be pricing in to their portfolios. It may move the general level of local asset prices, particularly stocks, but not to the same degree that it will affect Europe because over the past few months, the strategic moves of global portfolios is to raise their level of exposure to Asia. We had seen that strategy recommendation from every investment banker that had come to Manila since the end of 2009. At the end of the day, it will be the sound fundamental conditions of individual companies that should lend support for the markets. With corporate earnings mostly showing positive growth, our market will likely revert to its normal course over the next few days. We were disrupted by election anxieties and the possibility of another global contagion coming from Europe. The election discomfort is already playing itself out. All these calls of massive automated cheating is being discredited simply because the evidence bears out the contrary. If we focus on earnings of local companies, we really have lots of reasons to rejoice. For example, DMC disclosed net income rise of 82% in 1Q10 to Php 1.4 billion due to dramatic increases in its construction business and power and energy businesses. Net income at SCC which DMC owns a majority of was up 99% to Php 594 million which now owns Calaca Power. Both DMC and SCC are trading at single digit PEs. One reader sent me information on GMA7/GMAP GMA7 1 Q10 results. Net income is up 71% YOY to Php 855M showing an ROE of 29%. That should perk up the stock price although I would be slightly careful as network competition may erode market share. Anyway, GMA7/GMAP may see a bounce when the market perks up. I guess the question remains whether or not the rally that we have been seeing has finally run its course. I cannot say definitely if it is intact or over. All I know is that money or excess liquidity is the fuel for asset prices and financial assets are the most elastic of all asset classes. One thing for sure is that in the face of another recession, the major central banks will not pull out money from the system. Certainly, they will not squeeze the rest of the world all because of Greece. What Europe will do is they will strap Greece with stringent austerity measures if they want to save the Euro as a common currency. Otherwise, they will have to kick Greece out of the monetary union which is probably the better thing to do. Furthermore, inflation has been very tame. Headline CPI in the U.S. was reported at -0.1% down month-on-month for April. Core U.S. inflation as measured by CPI rose only 0.9% year-on-year. what this means is that there is no threat that the Federal Reserve Bank will pull back monetary growth. All told, I think what we are seeing is a classic case of fear overtaking the greed behind the most recent rally. remember that our market had gone up one the whole by 9% at its peak last week. At today’s close, we are barely 6% from the beginning of 2010, a 33% consolidation. Will our economy tank in the next 6 months such that stock prices should also spiral downwards? That is what is causing the fear. I do not want to second guess the economy; what I would like to do is choose companies that would do well even if the economy slows down again because I am still of the opinion that equities as an asset class is where returns can be significant.