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8:00 am  Thursday  13 May 2010   Philippine Stock Exchange Index   3269.48 (+0.2%)

If anyone is in doubt about our stock market, you’d better think again.  When GMA won the election in 2004, the stock market rallied 27%  in the 12 months following.  When Erap won in 1998, despite being in the middle of the Asian crisis, the market still rallied 20% in the succeeding 12 months.  I remember the mid-term election in 1995, we had an unstoppable market.  We saw the same thing in 2007, in spite of the fact that the U.S. market had already started to wobble with the cracks starting to show in the mortgage markets.

There is always optimism that accompanies an election exercise not only because of fresh hopes of remedies to existing problems, but there is always a premium that investors, whether local or foreign, attach to political stability.  With Aquino getting a very clear mandate, there is very little doubt that people will rally behind the program of government that he intends to pursue.  He may even have an easier time carrying them out particularly in the first year because both business and the various interest groups in the country will give him a chance – a honeymoon period, so to speak.

Yesterday, the market was not as strong as the trading day immediately after elections.  Even during the strength of the market last Tuesday, we saw some profit taking by those who made a bet on the success of elections, a risky proposition that paid off.  Why did the market not follow through with the rally yesterday?  Well, it is business as usual.  with the elections over, the market is looking for new drivers.

Overnight, we saw a strong move in the U.S. markets led by technology stocks.  The thing about tech stocks is that they are a definite harbinger of the underlying demand in the real economy, not only in the U.S., but globally as well.  I do not want to harp so much on Europe anymore because Greece is a dead horse that i no longer want to beat. Even China where people have been predicting a housing bubble for the last 12 months has become quite tedious to matter for the time being.  The thing is to notice that markets which are far removed from the various domestic or regional troubles try to carry their intrinsic strength.  Look at Indonesia where investors have been focusing on the stability of both political and economic scene in spite of stormy conditions of markets elsewhere.

What I am saying is that investors ought to focus on what is good about our market, not because we would like to be naive of underlying realities, but because that is what investors will be looking for.  Remember, it will all be a bout money flow; and in a smallish market such as ours, if an additional U.S.$ 500 million comes into our market over the next 6 months, that is enough bring the market up by at least 15%.  In my case, I choose to be fully invested right now and my choice of sector in the next six months would be the financials and those stocks with infrastructure plays.  while we have had good moves already with banks, I think with the exception of BPI and BDO, the banks remain cheap.  These are MBT (my current favorite), SECB, UBP, PNB (still a favored stock), and the newly chosen index stock CHIB.  I am even looking to consider RCB which has been showing signs of resiliency already.  Banks have been a good proxy for the economy in the Philippine equity market and I see the economy gaining further strength as the year wears on.

The 43% growth in Philippine exports in the backdrop of a strong U.S. technology market is a confirmatory indicator since more than half of our exports are technology and electronic products.  Furthermore, with the U.S. economy gaining more traction, I believe we will see further growth in remittances which should provide more money which the local economy can put to investment use.

There will be a lot of good plays in market in the months to come.  I would really urge everyone to increase asset allocation to the equities market.  I had a meeting with some lawyers last Tuesday and before we started the meeting, I had to share my thoughts with them that if one does not have equities exposure over this following 12 months, you will be losing a great opportunity to make money.  That is why I am convincing all my friends, relatives and even my kids to buy mutual funds with equity market exposure, if they do not have the wherewithal  buy stocks directly.  I feel that I am doing them a disservice if I do not try to convince them at all.

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