Investing strategy for 2017

We will be starting 2017 as a particularly challenging year coming from a difficult and peculiar one. Last year weighed down the local market and the world over with its terror attacks, bloody wars and conflicts, not to mention the unimaginable cost of human miseries and sufferings these issues have brought to places like France, Germany, Syria, Burma (Myanmar) and Nigeria.

Last year also brought stunning political shocks and upsets, the most remarkable of which were Britain’s vote to leave the European Union (EU) and the election of unorthodox or maverick leaders like Donald Trump in the United States and our very own Rodrigo Duterte.

With these troubling events, the market ended its last trading day on Dec. 29 largely on negative territory. The benchmark Philippine Stock Exchange index (PSEi) fell 5.80 points or 0.09 percent to 6,840.64, while the broader All Shares index was lucky enough to end with a net gain of 5.90 points or 0.14 percent at its closing level of 4,156.07.

Value turnover was light at P4.3 billion.  This brought down the average value turnover of the market for the week to fall to P4.2 billion and, in turn, dragged down average total transactions for the year to P7.2 billion.

Nevertheless, the market’s closing game was not all lost.  As the market settled under the red line, foreign investors’ trading direction had changed course.  Foreign investors became heavy net buyers, which perked up their market participation.

On the first day of trading after the Christmas break, or on Dec. 27, foreign investors’ transactions were low at 40.48 percent of total market value turnover.  The foreign investors were also largely net sellers.

But things started to change the following day. Their value turnover increased to 47.97 percent of total market transactions.  Though the course was not remarkable, their market performance for the day eventually became quite significant, having become net buyers.

What they did the next day on Dec. 29 was revealing.  It could signal what they have in mind, at least in the near future —foreign investors ended strongly as net buyers with a value turnover of 59.37 percent of total market transactions.

Bottom line spin

The market’s negative close for the year was not a total disappointment if you look at the sectoral performances. The financial sector did well at 6.76 percent with a 13.96x P/E (price/earnings) multiple, followed by the holding firms at 5.92 percent with a P/E multiple of 16.02x, and the property counter at 5.17 percent despite a P/E multiple of 22.95x.

The services sector ended badly with a negative 14.86 percent performance, weighed down by its relatively high P/E multiple of 14.86x.  The industrial sector also ended badly under the weight of a 16.51x earnings multiple with a negative return of 3.45 percent.

The mining and oil sector was the best performer with a 13.72 percent return at a P/E ratio of 27.20x. The good performance could even be enhanced this year with the recently announced plans of oil producing companies to firm up prices. Add to this the opening and reopening of several mines, too.

The other positive news was that the size of the market expanded by P973 billion in 2016 as total market capitalization ended at P14.44 trillion compared to P13.47 trillion in 2015.

The stock offerings that year helped support this growth and offset the decline in prices as the PSEi closed at 6,840.64 points or 1.6 percent lower than its close of 6,952.08 in 2015.  Total capital generated from the stock offerings, however, was lower than previous. About P170.12 billion was raised only in 2016, overshadowed by the P184.60 billion raised in 2015.

Nevertheless, the increase in market capitalization was a pleasant development that should help lead us to the appropriate trading strategy to beat the market blues in 2017. The strong market capitalization is a sign that while general prices have gone down, some stocks have actually outperformed their usual, registering positive returns.

Finding them this year would be interesting.  And the best investing model that could possibly provide the answer is no less than the “bottom up approach.”

The bottom up investing approach “focuses on the analysis of individual stocks and deemphasizes the significance of economic cycles and market cycles; the investor focuses his attention on a specific company, rather than on the industry in which that company operates or on the economy as a whole.” This approach assumes individual companies can do well even in an industry that is not performing.

Walk along with me in succeeding articles about the subject.