Selling pressure seen to continue

The local stock market is seen continuing to come under pressure from the outflow of funds from emerging markets due to the uncertainty over US monetary policy this week.

Last week, the Philippine Stock Exchange index slumped by 459.69 points or 6.86 percent to close at 6,242.26 on Friday, posting the biggest weekly decline since September 2011.

All eyes will be on the US Federal Open Market Committee meeting scheduled on June 20, during which the market will look for hints if tapering of asset purchases will indeed happen or be delayed for the meantime, said AB Capital Securities analyst Gregg Adrian Ilag. As of Friday’s close, Ilag said the PSEi was trading at a price-to-earnings (P/E) ratio of 16.38 times projected 2013 earnings, a premium compared to the long-run average of 14x and the regional median of 15x.

“We expect valuations to normalize toward the mean once liquidity starts to fade. This implies that there is still considerable downside risk from PSEi’s current valuation multiple,” Ilag said.

On the technical view, Ilag said the market has formed a head-and-shoulders pattern, with a head near 7,400, shoulders near 6,900 and neckline at 6,400. This also implied a downside for the PSEi, he said.

“Unless the Federal Reserve hints at sustaining quantitative easing, we hold our view that valuations will normalize toward the mean. Thus, we advise investors to stay liquid since better buying opportunities will surface once valuations ease,” Ilag said.

The analyst also noted that several local economic data were due for release this week, including the remittances from overseas Filipinos for April, the balance-of-payments (BOP) position, the gross international reserves and external debt.

Jonathan Ravelas, chief strategist at Banco de Oro Unibank, said the PSEi would likely hover between 6,000 and 6,400 levels. “If 6,500 is broken, (it) may try 6,800,” he said. However, he said failure to break the 6,400-6,500 levels might signal a test of 6,000.

Emerging-market stocks were on a decline as investors anticipated the Federal Reserve’s cutback of monetary stimulus that would trigger a rise in bond yields and lesser equity market valuations. At the local market, foreign investors were net sellers by about P2.3 billion last week, Ilag said.

By counter, the interest rate-sensitive property sector (-8.63 percent) was the most battered last week, followed by industrial (-7.33 percent), holding firms (-6.73 percent), mining (-5.26 percent) and services (-3.63 percent). Ilag noted that the index stocks that posted the biggest decline week on week were Jollibee Foods Corp. (-12.75 percent), Ayala Land Inc. (- 11.75 percent), JG Summit Holdings (-11.66 percent), Manila Electric Co. (-11.61 percent) and Universal Robina Corp. (-9.84 percent).

The biggest catalyst was Fed Chair Ben Bernanke’s statement that that if the US economy improves, the US monetary authority could reduce asset purchases. This speech also boosted the US dollar at the expense of other currencies. The peso, for instance, has depreciated by 5.4 percent after peaking at 40.83 to $1 before the speech.

Meanwhile, the Bangko Sentral ng Pilipinas has kept rates on overnight borrowings and special deposit accounts steady during its monetary meeting last Thursday. Doris C. Dumlao