‘Santa Claus’ rally seen despite volatility

MANILA, Philippines—The third quarter was a test of conviction for the bulls as the main index climbed to dizzying heights only to pull back to the year’s bottom. The reason: Extremely volatile global financial markets spawned by the fiscal contagion in the euro zone and the risks of the United States succumbing to another recession unleashed more bears into the stock market.

In the early part of the year, the consensus was for the Philippine Stock Exchange index to sustain its run-up for the third straight year this 2011 as well as to carve record highs on the back of growth in corporate earnings and mergers and acquisitions (M&As). While setting a new peak was indeed achieved by hitting 4,550 in early August, the head wind from the US and Europe has dragged down the PSEi by as much as 18 percent since then.

At the end of September, the PSEi closed at 3,999.65, plunging 6.79 percent for the quarter. It also wiped out all the gains for the year, thus falling behind by 4.8 percent compared to the end-2010 closing of 4,200. Only the mining/oil counter bucked this year’s downturn on the back of skyrocketing global commodity prices, particularly for gold and nickel. The mining/oil sub-index surged 47.17 percent in the first nine months of the year and 2.67 percent in the third quarter alone.

Looking forward to the fourth quarter, many are still hopeful of a Santa Claus rally. The only question is, how deep will the starting point of the yearend rally be? The Inquirer’s latest poll of stock market experts suggested that the conventional view was for the PSEi to end this year either flat or with a modest gain compared to last year’s.

While the long-term target is still 5,000, this is seen to wait until 2012, at the earliest, as prospects have dimmed even for this year’s peak of 4,550 being revisited soon. On the other hand, the index is seen bottoming close to the 3,700 level.

Highly profitable

But the good news is that despite the uncertain global economy, most corporations are still expected to exceed last year’s record-high net profits by double-digit levels this 2011.

“Simply going by the charts, there is very good chance that markets will bounce back. We see that through October-November,” said Roberto Juanchito Dispo, president of investment house First Metro Investment Corp. “There’s a fighting chance that the index will even be slightly higher than the end-2010 level.”

Dispo said FMIC saw corporate earnings a share (EPS) this year still growing 12-14 percent. As the sectors that FMIC favored continued to do well—such as financial and mining sectors—Dispo said FMIC saw no need to downgrade its original earnings outlook for 2011.

“We see the equity markets remaining attractive to local and foreign funds,” Dispo said.

Based on PSE data, foreign investors bought P15.6 billion more local stocks than they sold in the first nine months of the year despite the extremely volatile global markets. This net foreign buying for the nine-month period was 37-percent higher than the P11.37 billion in net foreign equity inflow in the same period last year. For the third quarter alone, there was still a net foreign buying of P867 million, although heavy net foreign selling has been seen in many days since then.

“The fact that the local market continues to absorb it [foreign selling] shows that the local equity market is still bullish,” Dispo said. “We also see a rebound in GDP growth in the second semester.”

Alex Pomento, head of research at Macquarie Capital Securities (Philippines), said the EPS of publicly listed companies would likely grow 16 percent this year and 12 percent in 2012. However, he said he did not expect double-digit earnings growth to be sufficient to lead the main index higher.

Near bottom

“Our fourth-quarter outlook best case [scenario] is now that we end flat at 4,200 due to volatile global market brought about the uncertainty in EU and weak US economy,” Pomento said.

Paul Joseph Garcia, senior vice president at Bank of the Philippine Islands, said that while it might be difficult for the index to retest the 4,550 high seen in August, a key support level at 3,720 was holding up well. “There’s a good chance that we’re bottoming out,” he said.

Garcia said the local equities market could see a 5- to 10-percent rally in the fourth quarter. “If we end higher, in positive territory, that will be a good base for next year because we’re seeing stronger growth [in 2012],” he said. “A lot of infrastructure spending may kick in next year and rebuilding efforts in the aftermath of [tropical storm Pedring] can help boost the construction sector.”

Asked whether the recent NPA raids in Surigao would hurt prospects for the mining industry, the darling of the stock market this year, Garcia said these sent negative signals to foreign investors but noted that the bigger concern would really be related to the global economy.

If the world would succumb to another recession like what was seen in 2008, Garcia said this would have an impact on demand for base metals like nickel, given that the rise in these commodities has been closely linked to the growth in China. But even in a sagging global economy, precious metals like gold were still expected to do well given that they were generally considered a hedge against global uncertainties.

Joey Roxas, president of Eagle Equities Inc., said there would still be a “Santa Claus” rally toward yearend but it could come from a low base.

“The bottom of the market is usually October but I think that this year, it had bottomed in September,” Roxas said.  He added, however, that investors would still be wary of risks to global economic growth, specifically China’s, whose industrial expansion was what was keeping metal prices high.

Market reforms

The combined market capitalization of listed issues on the PSE rose 11 percent to P8.2 trillion from P7.39 trillion in the same period last year. Total value turnover for the nine-month period reached P1.05 trillion, 24.1-percent higher than the level registered in the same period last year. In the third quarter alone, value turnover amounted to P384.52 billion, up 16.6 percent from a year ago.

Despite all the volatility, fresh capital raised from the stock market in the first nine months amounted to P64.54 billion, an improvement from the P59.1 billion raised in the first nine months of 2010. This was due largely to the initial public offering of Megawide Construction Corp., the follow-on offering of preferred shares of San Miguel Pure Foods Co. Inc., stock rights offerings of SM Development Corp., Metrobank and Robinsons Land Corp., and private placements in Banco de Oro Unibank, Metro Pacific Investments Corp., San Miguel Corp. and Marcventures Holdings Inc. The PSE also added Philex Petroleum Corp. to its roster of listed companies through a listing by way of introduction in September, bringing the total number of listed companies to 250.

Some of the reforms implemented by the PSE included the following:

Trading hours were extended starting October 1 to 1 p.m. to boost liquidity as well as to prepare for the introduction of an afternoon session starting January 2012 and to align trading hours with that of the PSE’s neighboring exchanges in the Asean region.

The listing-by-way-of-introduction rules were revived subject to the implementation of the amendments to the rules, which included the independent fairness opinion requirement for the listing applicant’s listing price of its securities.

The rule on minimum public ownership was revived, henceforth requiring that a listed company should maintain a minimum 10 percent of its shares in public hands.

The market regulation division of the PSE was spun off into an independent and self-regulatory company called Capital Markets Integrity Corp.

“Though the market remains volatile, it hasn’t stopped us from continuing reforms in the capital market. These initiatives, I believe, have contributed to increased trading activity and interest in the PSE,” PSE president Hans Sicat said.