No fundamental reason to sustain a continuous decline
Volatility has returned to the stock market, with the Philippine Stock Exchange index (PSEi) once again threatening to break the critical 6,900 support level.
Fundamentally though, there is no reason to be more bearish.
Inflation, which was one of the main catalysts for the market’s selloff earlier this year, is showing signs of peaking. Just recently, the government announced that October inflation was 6.7 percent, flat compared to the inflation rate for the month of September. More importantly, the year-on-year increase in prices of food and non-alcoholic beverages finally decelerated to 9.4 percent in October after accelerating consistently since June this year. Note that the persistent increase in prices of food and non-alcoholic beverages was largely responsible for the acceleration of inflation the past few months.
Numerous other factors should also bring down inflation. The Senate recently approved the rice tariffication bill, bringing it a step closer to being passed into law. This should help bring rice prices down as quantitative restrictions on the volume of rice imports are lifted.
Meanwhile, the price of oil is currently 25.5-percent lower from its peak of $76.41 a barrel. Coupled with the suspension of the increase in fuel excise tax next year, domestic transportation costs should go down.
The peso is also strengthening and is now at $1:P52.725 after weakening by as much as 8.8 percent earlier this year. The stronger peso should make imports cheaper, also helping bring down inflation.
Finally, the BSP raised benchmark rates by another 25 basis points during its November meeting, bringing the total rate hike to 175 basis points for the year-to-date period. This also sends the message that the central bank is serious about controlling inflation.
The expected slowdown in inflation is already reflected in bond rates. After hitting a peak of 8.321 percent in October, the yield on the 10-year bond rate is now much lower at 7.334 percent. Lower rates are good for stocks as this reduces companies’ funding cost. It also makes fixed-income products less attractive as an investment alternative.
Admittedly, the Philippines third-quarter GDP growth of 6.1 percent was somewhat disappointing as it was slower than the 6.2-percent increase registered during the second quarter. Growth was dragged by the deceleration in consumer spending growth, which slowed to 5.2 percent in the third quarter from 5.9 percent in the second quarter.
Third-quarter earnings results of listed companies were also unexciting as some companies were hurt by weaker sales due to rising inflation and the larger than usual volume of rains during the three-month period. Profits were also hurt by rising raw materials and operating costs.
Despite the slight deceleration in third-quarter GDP growth, we shouldn’t be too pessimistic as there were also some positives. Government spending growth accelerated to 14.3 percent in the third quarter from 11.9 percent in the second quarter, largely offsetting the weakness of consumer spending growth. The acceleration in export growth to 14.3 percent in the third quarter from 12.6 percent in the second quarter was also encouraging as this was achieved despite the negative impact of Boracay’s closure on the growth of exports of services.
Consumer spending growth should also recover going forward given that inflation is already showing signs of peaking.
Although third-quarter earnings results of listed companies were unexciting, we believe that this is already priced in given the depressed valuations of stocks. As mentioned in my previous columns, most stocks are already trading below their 10-year historical average P/Es.
Moreover, similar to the economy, factors that hurt profitability in the third quarter are only short-term in nature. The peaking of inflation should help boost sales and improve margins, leading to a recovery in profits going forward.
One factor that we cannot control is the Philippine stock market’s vulnerability to the movement of global equities. Just last week, the steep decline in the US market triggered the decline of the Philippine stock market. However, given improving fundamentals locally, declines should be less sustainable as more investors view selloffs as an opportunity to buy stocks cheaper.
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