With inflation so high, is it still a good time to buy stocks?
Just when we thought things were starting to look better domestically, the government on Thursday threw a monkey wrench when it disclosed that June inflation hit 5.2 percent. Not only was it up significantly from the May figure of 4.6 percent, it was also higher than the consensus forecast of 4.8 percent.
Even if we exclude the impact of items with volatile prices such as rice and oil products, core inflation still rose substantially to 4.3 percent in June from an average of 3.2 percent during the first five months of the year.
In reaction to the disappointing June inflation, the Philippine Stock Exchange index (PSEi) fell by 1.6 percent on Thursday causing investors to wonder: Is it still a good time invest in the market?
I believe so. Admittedly, the bad June inflation figure can cause the stock market to go down further. It can also cause any potential recovery to be delayed even more.
However, I would like to point out that stocks are already trading at a significant discount to their historical average valuation precisely because everyone is already bracing for the worst. In other words, the bad news is already priced in.
Based on COL Financial’s analysis on the valuation of 52 more actively traded stocks with a longer history of being listed in the PSE, 36 or 69.2 percent are already trading below their 10-year historical average price-to-earnings ratio (P/E). Moreover, 21 or 40.4 percent of the 52 stocks are trading at P/Es that are at least one standard deviation below the mean.
Simply, this means that 21 stocks traded at higher P/E levels 84 percent of the time during the past 10 years.
With analysts giving the Philippines a positive long-term view, I believe that economic conditions will eventually normalize. Once this happens, mean reversion dictates that stocks should again trade at their historical average valuation or P/E, handsomely rewarding anyone patient enough to sit through these tough times.
Patience is very important, which is why we always emphasize the importance of risk management. Use only long term money when buying stocks during steep corrections, and accumulate stocks slowly instead of buying all at once since we don’t know when and where prices will bottom. Finally, diversify to protect yourself against an uneven recovery among the different stocks.
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