Repricing factors for 2017
The market unfortunately remained in the red last week. A combination of present and developing events from outside and inside the home front dragged down the market.
The most critical was the recent decision of the US Federal Reserve to raise interest rates. The Fed also announced plans to increase rates two or three times more within the next 12 months. The Fed action may singularly weigh down on the market not only until the end of the year but well into the coming new year.
Technically, based on its weekly index performance, the market still has room to go further down. As seen in the last two weeks, the Philippine Stock Exchange index (PSEi) was still cruising the high level of 17.90x of earnings. Stocks in the broader All Shares index were also still high at 17.60x. Regional and selected investment territories around the globe remained relatively cheaper.
However, with the anticipated increases in funding requirements arising from pending plans to expand and/or build new enterprises, the financial sector’s valuation of 14x of earnings is becoming interesting. The industrial and holding firm sectors, likewise, are also starting to look good enough at their present pricing levels of over 16x of earnings.
The wait to enter the property sector may soon end. Its 23x of earnings pricing may not drop that much lower anymore. This is because the sector has added to its business portfolio township developments, in addition to highly profitable standalone projects, to explore and exploit the relatively underserved housing demand for the population’s sweet spot that is growing as a result of increasing productivity and earning power.
The services sector’s pricing may still drop lower. Its present earnings multiple of 19.5x is still high. Being one of the investment favorites of foreign investors, it is at the moment suffering from net selling activities. Profits can still be realized, however.
With the price of oil expected to trade between $50-60 a barrel, and with the inevitability of reopening or opening new mines, the mining and oil sector could stage a rally. The sector’s present price level of 28x of earnings is already low enough compared to the normal historical record of 40x.
Bottom line spin
Believe it or not, President Duterte’s behavior has something to do with it, too. A slight but real decline in his latest satisfaction ratings in the National Capital Region after almost six months at the helm of government is ominous.
Observers find Mr. Duterte’s doublespeak, unrestrained use of expletives, stubbornness, and hasty statements that are later retracted, together with the mounting extrajudicial killings or what the PNP called as “deaths under investigation (DUI)”, are contributing to the present weakness of the market and its possibility of sliding further.
The expletives were amusingly folksy at first, eliciting some semblance of behavior ordinary folks could identify with. But his antics are losing magic fast.
The country’s traditional sources of investments are now either on hold or are simply slipping away.
Another factor is the haste shown by the President’s acolytes in changing the political system to federalism.
Federalism may appear to be a good theoretical alternative for the shortcomings of a unitary political system, but studies made in the last 30 years to determine whether federalism or any form of decentralization could lead to less corruption had no categorical conclusions. At best, they were deemed to need more empirical research.
Federalism, moreover, “prevents the creation of a national policy.” The United States is cited as one example that does not have a single policy on issues. Instead, “it has 51 policies, which often leads to confusion.”
Likewise, “federalism leads to a lack of accountability; the overlap of the boundaries among national and state governments makes it tricky to assign blame for failed policies.”
In several instances, federalism also failed to solve ethnic conflict and secessionism.
This goes to show that our country’s leaders must go slow on federalism. For it to work effectively and responsive as a form of government, it must be properly designed to suit a country’s needs.
