Bull run up ahead?

QUESTION: The stock market has been on the rise for the past two weeks. What started as a rally after a major sell-off in December became like another bull run in the making. I plan to invest more but I am not sure if this uptrend is sustainable. Will share prices continue to go up?–Alison Keth by e-mail

The current uptrend in the market will most likely be sustainable in the next few weeks, until at least up to the end of January if we are going to follow historical trends.

Over a year ago, I wrote in my column entitled “Will there be a Santa Claus rally this Christmas?” that for the last 28 years, the Philippine stock market has almost always rallied during the last five days of the year with an average gain of 2.3 percent.

The last five days of December last year saw the market recovering by 3.8 percent from 6,966 to close the year at 7,230. In the same article, I also explained that based on historical data, there is also 93-percent probability that the rally may further extend up to the end of January with an average gain of 3.5 percent.

If we are going to factor the same magnitude of the strong performance last December where the actual gain was 65 percent higher than average, the target gain by end of January should be 5.8 percent, which translates to 7,370. This level has already been achieved but it looks like the party has just begun.

Incidentally, this level is nearing historical market resistance. As this resistance has been tested many times in the past, a breakout of this level could be very significant. It may mean a new wave of bullish uptrend toward 7,860 this year.

Such resistance has been quite strong because there was no way the market can justify its already high valuation at 18x P/E. Recently, however, oil prices have been falling drastically to levels that have not been seen for years.

Lower oil prices are seen as earnings booster for many listed companies which could prompt re-rating of stocks through earnings upgrade later on. Higher earnings forecast for this year and the next will mean lower P/E at current level, hence, giving good reason for the market to buy now and drive the market higher.

What is more interesting to note is that the Philippines has been identified as one of the countries that will benefit the most from the current oil price fall. The Philippines’ oil consumption represents about 5 percent of its Gross Domestic Product. Imagine how the savings from low oil price, which has declined by more than 50 percent from its average rate of $110 a barrel, can potentially benefit many companies that rely on fuel and fuel-sensitive costs.

Lower oil prices will also mean higher disposable income for consumers. With an economy that has high marginal propensity to spend with 80 percent of annual income, higher demand for consumer products and services can be expected. Higher spending will mean higher sales, which should support the growth momentum in the economy further.

Stocks that will most likely benefit from this are the consumer and airline stocks. Consumer stocks such as SM Prime Holdings (SMPH), Robinsons Retail Holdings (RRHI), Store Specialists Inc. (SSI), Puregold (PGOLD), Max’s Group (MAXS) and Jollibee (JFC) are market leaders. Cebu Air (CEB) should also get significant cost savings as 50 percent of its operating costs is spent on aviation fuel.

With a slowing global economy, not all countries are going to benefit from falling oil prices. Obviously, oil-producing countries will be the biggest losers. Some countries are already facing threats of rising deflation. Most markets are expecting only single-digit earnings growth.

The Philippines is one of the few in Asia that will enjoy 16-percent growth in corporate profits this year, not to mention the potential earnings upgrade by the middle of the year once the full effects of low oil prices are slowly factored in.

With this promising outlook as one of the most attractive markets in Asia, it will not be a surprise if investors will also start paying premium, underpinning the index to trade higher.

While falling oil prices definitely offer a lot of opportunities that the market can enjoy, there are risks that we should watch out for. Remember that declining oil prices is a result of weak global demand and increased supply. It is possible that the current low oil price regime may not last long.

The economies of China and Europe may suddenly rebound and increase demand for oil. Conflict may break out in the Middle East that could affect oil production. The Opec may finally agree to cut production to adjust existing oil supply with current demand. All of these scenarios could trigger oil prices to increase, though it may not be easy to bring them back to previous levels.

The other potential risk is that the sustained price fall of oil may cause serious financial distress to some oil-producing countries, which are currently running on huge deficits. If any sovereign borrower fails to pay its loan on time, this may cause extreme uncertainties in the financial markets.

Historically, oil prices have strong negative correlation with the US dollar. When oil prices fall, the US dollar strengthens. A stronger dollar means weaker corresponding currencies in the emerging markets like the Philippines. When the peso depreciates, portfolio profits by foreign fund managers deteriorate. This may limit funds flow into the local market as it will become more attractive to invest their money in their homeland.

For now, it will be great to take advantage of the strong momentum and enjoy the ride.

(Henry Ong is a Registered Financial Planner of RFP Philippines. To learn about value investing in stock market, attend the globally recognized Accredited Financial Analyst (AFA) program on Feb 21 to Mar 28. For more details, inquire at [email protected] or text <name><email><AFA> at 0917-3464126.)