MANILA, Philippines—The Philippine stock market on Tuesday descended into “bear” territory for the first time in four years as global jitters over a credit crunch in China heightened the risk aversion sparked by the prospects of rising US interest rates.
The main-share Philippine Stock Exchange index (PSEi) slipped by 181.99 points, or 3.05 percent, to close at 5,789.06, battered by a continuing sell-down by global funds of emerging market assets.
Since peaking at around 7,400 in mid-May, the index has retreated by a total of 1,614.76 points, or 21.8 percent. A market is technically deemed bearish when it pulls back by 20 percent.
Net foreign selling on Tuesday amounted to P1.87 billion at the local bourse. While mostly very liquid, local investors mostly stayed on the sidelines given the technical reversal of the bull run that started in 2009.
Socioeconomic Planning Secretary Arsenio Balisacan said the financial market woes were temporary and incapable of dragging the Philippine economy’s strong growth performance.
Balisacan said the fall of stock prices and depreciation of the peso were not significant enough to eventually hurt the real economy.
Strong fundamentals
“The country’s macroeconomic fundamentals are pretty strong and are not vulnerable to the effects [of the latest financial market developments],” Balisacan said.
He added that the government’s official economic growth target of 6 to 7 percent for the year need not be adjusted just because of the latest developments in the equities and foreign-exchange markets.
Correction, depreciation
Balisacan said the drop in the PSEi over the past few weeks was a correction given the steep rise seen earlier in the year that made the average price-earnings ratio in the Philippines one of the highest in the world.
He said the depreciation of the peso (now lingering in the 43-to-a-dollar territory) had its benefits.
“This will be an advantage not only for the exporters but also for domestic industries whose products compete with imported goods,” Balisacan said.
Last year, the peso became one of the fastest appreciating currencies against the US dollar. It appreciated by nearly 7 percent throughout 2012 to close at 41.05:$1 on the last trading day of the year.
The strengthening of the peso elicited complaints from exporters, who said this was making Philippine goods more expensive for foreign buyers and, therefore, less competitive.
Relief for export sector
Balisacan said the latest fall of the peso, therefore, should serve as a relief for the export sector, which has suffered from declining revenues due to a lackluster global demand.
Finance Secretary Cesar Purisima said the country must keep its macroeconomic fundamentals healthy to avoid the sustained exit of foreign portfolio capital.
“The best thing we can do is to continue up the path of better economic fundamentals so business will continue to thrive,” said in a text message to the Inquirer.
Manny Lisbona, deputy chief at PNB Securities, said there was growing concern about China’s shadow banking sector, which investors were comparing with the United States’ past credit crisis. “Hence, some investors are taking money off the table,” he said.
Fleeing ‘hot money’
With the twilight of the US’ regime of easy money, combined with fresh economic woes in China, the market is seeing a reversal of what was previously seen as an exuberant flow of portfolio funds or “hot money” into emerging markets.
US Federal Reserve Chairman Ben Bernanke recently said that the US central bank’s aggressive bond-buying activities, known as quantitative easing or QE, would end soon.
Lured back to US
This suggests that a lot of the liquidity that flowed into emerging markets and inflated their asset markets over the past three waves of QE would be lured back to the United States as US interest rates bottom out from near-zero levels.
At the same time, foreign funds have made a lot of money from emerging markets in the past few years and are now looking at investment opportunities in the United States, where recovery is seen gaining traction.
Dealers said the outflow was shifting focus from the underlying economic fundamentals and strong corporate earnings prospects of the Philippines.
“This bear market drop will be very shallow and short-lived in view of the excellent economic fundamentals. The economy is in great shape but the market has broken down due to hot money flows. Bernanke and the China slowdown are the catalysts,” said veteran stock broker Ismael Cruz, president of stock brokerage IGC Securities.
“Also, the history of bear markets says it lasts only 10 to 12 months, based on the post-World War II experience of (US index) S&P 500,” Cruz said.
He said the PSEi might be able to find a “rock-solid” support at 5,500 based on a historical P/E (price to earnings) ratio of 15x over the 20 years alongside technical support.
Panic selling
“The ‘bear’ word caused already jittery investors to panic. Panic selling has uncovered numerous bargains already. I would expect a rally as soon as selling appears overdone and no longer reflects fundamentals, which may have in fact become better because of the recent peso depreciation,” said Joseph Roxas, president of Eagle Equities Inc.
In a research note, stock market brokerage DA Market Securities said that considering the added concerns stemming from China, whose situation was being compared with the 2008 financial crisis in the United States, investors should expect more volatility, which could bring the index to more ideal levels of support—5,655, 5,360 and 5,219.
On a five-year chart, DA Market believed that 5,219 was a major trend support—the ideal support for the uptrend which started the bull run since 2009.
“We continue to believe in sound fundamentals in the local economic and corporate setting, despite being affected by external sentiment in global markets,” DA Market said.
“Investors looking to buy in tranches may do so at these major supports. However, other investors may opt to see some stabilization before positioning. While some may even wait for upward momentum to resume,” DA Market said.
China’s ‘shadow banking’
The latest concern on China was triggered by the surge in short-term cash rates last week after the People’s Bank of China (PBOC) allowed money market funding to tighten to control credit for China’s lightly regulated “shadow banking” sector.
In a research note, American investment bank Bank of America (BofA) Merrill Lynch said it was cautious on China at the moment because its interbank credit crunch had been getting worse with media speculation about a moratorium on transfers and cash withdrawals even at some of the largest banks.
The biggest risk was seen coming from a potential mishandling of the situation by the PBOC.
“In our view, dealing with banks in breach of regulations should be done by improving prudential regulations rather than engineering an interbank credit crunch, which could potentially backfire should banks lose mutual trust,” BofA Merrill Lynch said.
The investment bank said China would have to end the credit squeeze soon in order to calm investors and to stabilize the economy.
5th day of free fall
The Philippine stock barometer slipped for a fifth straight session on Tuesday, tracking the decline in most markets in the region.
All counters were in the red but the most battered was the holding firm sub-index (-4.33 percent).
Total trades amounted to P12.97 billion. There were nearly six decliners for every single gainer.
The day’s biggest index decliner was Belle (-11.54 percent) followed by AC (-9.19 percent), Bloomberry (-8.1 percent), EDC (-7.34 percent), Megaworld (-6.45 percent), AEV (-5.88 percent), ICTSI (-5.7 percent), Petron (-4.83 percent), Jollibee (-4.22 percent) and DMCI (-4.17 percent).
Among those that bucked the day’s downturn were SM Prime (+3.21 percent), MWC (+1.36 percent), Philex (+1.2 percent), Meralco (+0.98 percent) and Semirara (+0.87 percent).
At current price levels, the markets’ price to earnings ratio (P/E) had gone down to 17 times, which means investors are paying 17 times the amount of money they expect to make this year, according to Lisbona.
He said it was “cheaper than a few weeks ago (when P/E hit as high as 22 times) but maybe not cheap enough for the bulls to return.”
Originally posted at 02:08 pm | Tuesday, June 25, 2013