MANILA, Philippines—The Wall Street turmoil arising from the loss of the US’ sterling credit grade has spoiled the local stock market’s recent climb to new peaks but most financial experts think that the Philippines’ resilient fundamentals would eventually prevail to keep the bulls at play.
On Tuesday, the main-share Philippine Stock Exchange index wiped out all gains for 2011 as it slumped by 174.21 points, or 4 percent, to finish at 4,157.03. This was the equities market’s worst single-day performance in two years as investors were unnerved by the 634-point plunge by the Dow Jones Industrial Index on Monday after global credit watcher Standard & Poor’s downgraded what used to be the US sovereign’s AAA credit rating to AA+.
The PSEi is now 1.05 percent lower than its closing of about 4,200 level at end of 2010 and has pulled back by about 393 points, or 8.6 percent, from its recent record high.
“Foreign selling is the reason behind the fall in the PSEi. The reason for the selling is simple – foreign-domiciled funds are taking profit to compensate for their losses in other stock markets,” said Eduardo Banaag Jr., vice president at local investment house First Metro Investment Corp.
There was about P1.54 billion in net foreign selling at the PSE on Tuesday. Net foreign outflows were likewise heavy on Monday amounting to P1.63 billion.
The turmoil in Wall Street that is likewise weighing down stock markets across the world is seen as reflective of concerns on how the US’ fiscal woes would spill over to “main” street.
Sanjiv Vohra, chief executive officer of Citibank in the Philippines, noted that the beating taken by stocks reflected concerns on how the US economy would fare over the long term. The landmark US agreement to raise the debt ceiling and avoid a sovereign debt default had assumed a higher growth path for the US.
“The whole question is if the growth doesn’t happen, it will exasperate the fiscal situation,” Vohra said in an interview on Tuesday.
The local stock market, like other markets in the region, is in turn anticipating how the slowdown in the US could affect the domestic economy.
“Fortunately, if you look at past history, which again goes back at the financial crisis, the Philippines has been resilient as it has very little reliance on net external capital or external flows. If you look at foreign capital as a percentage of GDP [gross domestic product], it’s very small so if you use that as surrogate, the Philippines should be able to withstand it relatively better than other countries that are more globally linked on a long-term basis,” Vohra said.
Outside of the impact on stocks, the banker noted that on the other hand, the peso exchange and Treasury bond market have so far been hardly affected by the turmoil. On Monday, local Treasury bill rates even fell across the board at the government’s primary auction, Vohra noted.
Despite the hefty drop of the local stock market, the peso closed on Tuesday at 42.52, relatively stable from Monday’s 42.50 per $1.
“The fundamentals will remain difficult for the US because the market is concerned how it will address the fiscal problem. On one hand the market is looking for a better fiscal response from the government but it also knows that if it’s too tight, the economy will slow too much and it’s already slow,” said Tony Cripps, HSBC CEO for the Philippines.
Cripps added that other credit rating agencies had not downgraded the US, so the risk aversion was also partly coming from fears that there might be other sovereigns – like Europe – that could be downgraded.
Asked whether banks were preparing contingency measures to insulate the local financial system, Bankers Association of the Philippines president Aurelio Montinola III said: “I think we’ll just observe for now. It’s hard to jump to conclusion. Markets are obviously volatile and the obvious implication is long period of slow growth for the developed world and if that will spill over. We’ll just wait and see.”
Montinola, who is also president of Ayala-led Bank of the Philippine Islands, said his bank had over time been diversifying its bond holdings to include attractive Asian corporates and sovereigns to hedge against any potential volatility in US Treasuries.
“So we don’t have too much of a problem and I suspect that many of other banks are in that stage (of diversification),” Montinola said.
Gina Goco-Morales, executive vice president at Philam Asset Management Inc., said downward volatility was expected in the next few days but with a good number of news likely to cushion the fall. For now, she said, the bias would be on the negative given uncertainties brought about by the US and European debt crisis.
“It might get worse before it gets better,” Goco-Morales said.
“But I think it will bounce quickly too and trade at a range for a long time. So I think in fact these next few days will be a good buying opportunity. Fundamentals are strong. P/E [price to earning] ratios are at the mid-range versus Asian neighbors. Now investors will have to consider Asia as the investment haven. Liquidity will eventually find its way in Asia and the Philippine equities will be a beneficiary once a reallocation of (global investment portfolio) happens in the aftermath,” Goco-Morales said.
Mark Angeles, head of research at First Metro Securities, said investors’ reaction to the US developments was a “bit overdone.”
“The bloodbath warrants a bounce but we keep our fingers crossed,” Angeles said.
FMIC’s Banaag said the US stock market was poised to settle, if not bounce, anytime now.
“While rating agency S&P was right to downgrade US long term debt, the US stock market is way, way oversold. Moreover, sellers of US stocks believe that a double-dip (recession) has arrived – where the economy goes, so will the stock market. Buyers, on the other hand, are taking their cue from what leading economic indicators are guiding to – US GDP growth will not dip but settle to around where it is at the moment, with the low probability of accelerating or improving in the third quarter,” Banaag said.
If history repeats itself, Banaag said the US economy would not succumb to a double dip and the stock market would stabilize, if not bounce, sooner than what sellers expect.
In fact, he said the US stock market should do better than the US economy as 45 percent of the revenues of S&P 500 companies were coming from markets outside the US.
“The local stock market, along with Indonesia and Thailand, has been outperforming all other markets globally, with good reason – our international credit rating is improving, while those of the largest economies, like the US, are deteriorating,” Banaag said.
“While profit-taking by foreign funds will persist, our market will end or close higher by end-August compared or relative to today,” Banaag predicted.
By September, Banaag said inflation in the Philippines would likely be less than what anyone had expected, noting that the international price of oil has gone 30 percent lower than its recent peak.
Interest rates, by October, will fall to another historical low. “In turn, more cash will move to equities from fixed income, as stocks promise much higher returns,” Banaag said, adding this would be the kind of market that large, institutional funds prefer when they need to deploy investible cash.
“Smart money knows that, in the near future, stock prices will be higher than where they are today. The forward PE ratio of the market is now less than 12x. Historically, the index gains no less than 16 percent six months after trailing PE’s fall to this level,” he said.
A PE ratio of 12x means that buyers are paying 12 times the amount of money the stock is making for a given period.
“Will foreign funds buy back? Yes, because the peso is now considered a safe haven. This week, central bank reported our international reserves exceeding our foreign debt, the result of the long accumulation of OFW remittances, as well as the growing strength of the peso,” he said.
On Tuesday, all counters at the stock market traded in the red, led by the holding firm, property and services counters which slumped by 4.3 percent, 4.6 percent and 4.7 percent, respectively. The financial, industrial counters and mining counters likewise faltered by over 3 percent.
Value turnover at the market was heavy at P8.2 billion. There were 12 decliners for every single gainer at the market.