12:30 pm Monday 15 February 2010 Philippine stock Exchange Index 2963.24 (+0.46%)
In the dynamics of any market, there are periods when prices do not move in a directional trend. Normally, stock prices move up because there are very strong reasons to increase investors holdings of stocks. When the broad economy is healthy, the business environment becomes robust and companies expect to make good profits and return this to investors by way of dividends or higher values of assets. Of course, when there is a threat to the smooth running of the economy or it becomes clear that the economy is contracting, the opposite happens. Business uncertainty always drives investors into conservatism.
In trending markets, i.e. rising or falling prices, we come to periods when asset prices have gone beyond investors expectations or returns have become to good to pass up. This is when consolidation sets in and it is normally when trading ranges occur. In the case of the Philippine stock market, we saw a 63 % return for the index in 2009; it is but natural for investors to try to consolidate these gains by taking back cash into their positions which means selling into further strength. Remember that among experienced investors or traders, no one is so cock-eyed to believe that markets are like a balloon which floats up in the air and never comes down.
Presently, there are factors which are causing investors to protect their portfolios. A few weeks back, the U.S. heard their president say that he would force banks to get rid of their risky positions taking the U.S. market into a tailspin. This was followed by the anxiety on Greece’s debt situation, once again raising levels of anxiety in the market. Last Friday in China, the people’s Bank of China raised reserve requirements for the second time in a month responding to loan growth which continues to accelerate and causing property prices to surge once more. While the short-term effect is to see markets respond negatively, its longer term effect is to avert asset bubbles and restrain inflation particularly since the China economy grew 10.7 percent in the fourth quarter from a year earlier, the fastest pace in two years.
In contrast, the Euro Area declined a seasonally adjusted 2.1 percent in the fourth quarter, and for the full year, the economy contracted 4 percent. Industrial production in the region fell 1.7 percent in December, the most in 10 months. Meanwhile, in the U.S., retail sales rose in January, but a separate consumer-sentiment index fell in February, indicating mixed signals coming from the economy. Stripping out autos, gasoline and building – core retail sales rebounded by 0.8% after declining by 0.3% in December. Core retail sales are up 5.3% over the last three months at an annualized rate, an indication of robust growth in household consumption. This reflects a healthier picture compared to the headline data.
The difficult thing about markets is that they are always fickle. Markets will react in the most whimsical way, but, in my opinion, the bottom line is always dependent on the cash positions of both individual and institutional investor. Over the last two months, I reckon that many portfolios had become fully weighted in their equity positions. Having little in their cash balance, they become edgy causing them to sell on early indications that markets could fall. This is what leads me to think that markets would trade in a range over the next few weeks, and the range will continue for as long as investors are not yet comfortable with their cash balances. When they have enough cash to again put at risk again, then the rally continues.
In the meantime, it would be interesting to see what happens to Greece and the rest of Europe, after all, most of Asia will be closed these two days because of Chinese New Year. It would also be useful to check your portfolios for stocks that have become expensive compared to their cheapest levels in 2009.
