Market seen entering bear cycle

LOCAL stocks could be on their way to entering the bear cycle given the challenging global environment and uncertainties arising from the forthcoming national elections, the chief of BPI Securities said.

“The happy hour ended prematurely because there’s no more bartender,” BPI Securities chief executive officer Michaelangelo Oyson said in an interview Monday.

In the past, he said the world had US Federal Reserve chief Alan Greenspan and his successor, Ben Bernake, who provided monetary stimulus that lifted emerging markets.

“But currently, (the current US Fed Chair Janet) Yellen refuses to play the role of a bartender and that’s causing market volatility,” Oyson said.

He said Bank of Japan Governor Haruhiko KurodaKuroda was “trying to be the bartender but he doesn’t know the right mix for the cocktail.” “So until Yellen shows her hand, the market could enter a high period of volatility.”

A bear cycle is defined as a period of continuously falling stock prices. Typically, the threshold is when prices have fallen by 20 percent from the peak and stayed there for at least two months.

Early this year, the Philippine Stock Exchange entered the “bear” territory for three weeks but it recently rebounded by 617.08 points or 10 percent from the bottom of 6,084.28.

Oyson said there was still “one more leg down for the market” which could retest the 5,800 level, at which level investors will pay 15 times expected earnings for the year or in line with 10-year average valuations.

“Foreign investors are still not sure at what level of GDP (gross domestic product) growth China will stabilize. There has been a continual downgrade of growth forecasts for China so as consensus forecasts are cut, the markets look for the next equilibrium. That’s why the market is moving largely on data points from China,” he said.

He said the rotation of foreign funds from emerging markets (EM) to developed markets (DM) started in 2012, but since then, some foreign money remained in the Philippines. Since 2012, he said Thailand had seen about $10 billion in foreign exchange outflows while the Philippines and Indonesia still had about $3 billion and $2 billion in net inflows despite the rotation of funds.

“That means we’re still at risk,” he said, adding that “petrodollars” or foreign inflows from oil-exporting countries had been partly driving the local market in recent years. But with the slump in oil prices, he said these petrodollars had been flowing out and sovereign wealth funds of oil-rich countries had been consolidating.

“We could be entering the early bear part of the cycle… and with the uncertainty arising from the presidential elections looming, risk premium could increase,” he said.

This is the time for investors to sell on rallies and pick up good stocks at good valuations. For an individual investor, he said it was an opportunity to pick up consumer names when the index is below 6,000. These include Universal Robina Corp., Puregold Price Club, D&L Industries and Jollibee Foods Corp. The consumer sector is still a thematic investment considering that it accounts for 400 basis points of the country’s 6 percent GDP, Oyson said.

“If you have to be in the market, stick to defensive stocks like Meralco, Aboitiz Power and Semirara. Interestingly, Jollibee has historically outperformed index in times of volatility,” he said.

But Oyson said it could be a shallow bear market if these two factors would come into play:

If Yellen signals that the US dollar has topped- which basically means a slowdown in the reversal of outflows from emerging markets to developed markets

The next president can convince investors that reforms started by the previous administration will continue and GDP could continue to grow closer to 6 percent yearly.