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11:39 pm  Wednesday 30 June 2010

I don’t know if many of you follow this relationship, but the daily correlation between Dow Jones Industrial Average (DJIA) and the PSEi fell to 0.19  in the 2nd quarter from 0.93 in the 1st quarter.  The perfect correlation is 1.0 so the decoupling theory was confirmed in the recently ended quarter.  The question that lingers in the minds of many is whether this disjoint will continue in the coming quarter.  Historically, the 3rd quarter is not very straightforward in the local market.  In 2007, we had a strong July only to see it tumbling from August to September.  The market went on to recover until October when a second peak was seen.

Fortunately, even if global conditions are still shaky at this point, most of the bad news is already in the open.  The problem with 2007 was that the crisis was all below the surface and the financial markets were in denial.  This time around, the financial markets have been discounting one crisis after another even if they are not yet sure to happen.

For example, from 2007, most market analysts have been warning of asset bubbles bursting in China and even South Korea.  Actually, overpriced assets such as real estate and large capitalization stocks in the two countries have adjusted in price.  If you look at China, their market has tanked to the 2,500 level and has been stuck in that range for a few months now.  The Chinese monetary authorities have also pulled back financing for speculative purposes.

In Europe, the crisis in Greece sparked anxiety for Portugal, Spain, Italy and Ireland.  So far only Greece has really gone to the tank.  Spain and Portugal has managed to restructure their funding program without much controversy, although they’ve had to pay up for the money.  Italy and Ireland, should they come into further trouble, will no longer be a surprise.  Even now, their financing positions have been analyzed to death by global think tanks, investment banks and supranational financial institutions.  Any possible crisis, I think is already in the price of most assets, including Philippine stocks.

The local market, I believe, continues to present good value for investors.  For one, our financial sector is very sound which is something that cannot be claimed by economies in Europe.  The power sector, for its part, is facing strong growth prospects.  Profitability of the sector is also quite compelling.  Given the enviable consumer spending reflected in the 1st quarter GDP figures, consumer and housing related stocks should present favorable prospects.  The beating that the biggest telco stocks took in the 2nd quarter should start making the stock attractive.  TEL for one is giving dividend yield of 9% per annum at today’s prices.

In short, I think we enter the 3rd quarter with skepticism coming not from internal sources but from troubles outside the Asian region even.  What it will bring is volatility that will be purely sentiment driven.  I for one think that situations such as this is a formula for portfolio outperformance.  Of course, one must watch prices very closely to see the ebb and flows of the tide of buying and selling.  Just like the a skilled sailor is able to sail with the tide, so should a skilled stock market investor.  The thing about the sea, the tide is predictable.  The stock market is little more tricky; nevertheless, the tide of sentiment can be detected, just as a physician is able to detect a pulse rate.  You just have to keep your finger on the artery.  For us market people, the lifeblood is money.  We should the be persistent in following the money flow which is the pulse where our finger should be.

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