Ultimate Value by Gus Cosio
When I look at the PSEi chart, I observe that the foot of the current rally started on December 1, 2011. It was after good numbers were announced in the U.S. about Black Friday and Cyber Monday sales. The U.S. market got encouragement because the record sales during these two closely watched shopping days presages the mood and buying power of the American consumer. It is supposed to pave the way for robust Christmas season consumer spending which is a good reflection of consumer confidence and good underlying demand in the economy.
In the Philippines, the Christmas season is always great fro consumer spending because many really set aside cash for the holidays as it has been a tradition in the country to splurge during the season. It is not unusual then that Philippine stocks have been on an uptrend since then. Of course, the good economic figures and continued low interest rates provide investor confidence to investing in stocks. Furthermore, the prospects for a better economy encouraged greater appetite for taking risks in the local market.
At first, I thought that the year end rally was merely a Santa Claus rally which fund managers take advantage of to dress up their favorite stock positions. However, as the rally carried on into the weekend before Chinese New Year, I got the sense that the enthusiasm went much further than that. Recall that much of this rally was fueled by index stocks that had lagged the market the previous year. Ayala stocks, as an example, rose relentlessly until yesterday simply because they were catching up with the rest of the market. TEL was upgraded by Morgan Stanley in a report early in January causing the stock to soar close to 2900 since the new valuation the analyst suggested was 3400 based on improvement in the growth of its broadband business as well as the efficiency brought about by the acquisition of the DGTL network. The Sy stocks also zoomed with the idea that consumer spending would be a major theme for 2012. Bank shares led by MBT also rose sharply as the low interest rate environment provided a good backdrop for mortgage and consumer financing.
All told, there was a good amount of reasons to be very positive on Philippine stocks particularly because the government has no choice but to speed up infrastructure spending in 2012. This was why DMC and MPI rallied together with the larger capitalization stocks. Not to be outdone, the up and coming mining stocks of ORE and NI showed the way for the sector leaving the more seasoned LC and PX to catch up.
With all the positive sentiment prevailing in the market, why is the market taking a beating these past three days?
Well, investors must recognize that even in a bull market you will never do away with market risk. Prices will consolidate because traders and investors alike will take their profits and put to safety some of their cash in order to increase the longevity of their earning power and raise the returns on their portfolios. I believe that the present consensus is that the Philippine stock market is headed higher this year as earnings growth shifts to higher gear in 2012. This prospect is not unreasonable given that in spite of all the headwinds faced by our economy in 2011, jobs were created, remittances came in, and now the national government is now deploying expenditures to restoring existing infrastructure. The prospect of government embarking on new infrastructure projects is becoming a reality and because stock investing is forward looking, it is quite likely that investors will raise their subjective valuation for their favorite stocks.
As for mining stocks, metal prices have started to regain their luster. I think gold stocks like PX, LC/B and MA/B are attracting renewed interest. As for nickel stocks like ORE and NI, the story may be different even when nickel prices are similarly rising. I think the enormous profitable prospects for these two stocks arising from their mineral resources, regardless of LME prices, are the compelling reasons for the strength of their prices. These are the underlying reasons why the mining theme will continue to attract investor interest in spite of wild swings in their prices. At the end of the day, value will dominate the ultimate appreciation or decline of prices. As far as mining stocks are concerned, it will always be the mineral resources available to the mining company that will provide a floor to its stock price. Should prices fall, I think support will eventually develop at a level not significantly lower than the absolute value of mineral resources. We are seeing this in LC; we saw it when ORE declined in 2011; and should NI decline, we will probably see a similar assessment of value.
Also, I believe that the risk to reward ratio in investing in the Philippines have tipped in favor of better reward for every unit of risk taken. The critical mass of the economy is much bigger today than it was when the global financial crisis happened in 2008. The experience of asset preservation in the country in 2011, a midst the turbulence in Europe, has established the Philippines as a safe destination for investing. As such, I would see this dip in the market as an opportunity to build positions. The best is yet to come.
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