More reasons to trade above 8,000

The Philippine Stock Exchange index (PSEi) has been very volatile this year. And although it already hit a high of 8,400 in July, it seems to be encountering difficulties staying above the 8,000 mark as investor sentiment remains poor given the downside risk brought about by the ongoing US, China trade war.

Nevertheless, there were numerous developments the past few weeks strengthening our conviction that the PSEi would end the year above 8,000.

One of the main reasons for this optimism is that central banks globally continue to pump liquidity, which is favorable to equity markets given the resulting drop in funding cost and yields on fixed-income instruments. In October, for example, the US Fed cut rates by another 25 basis points, bringing the US benchmark fund rate down to 1.5-1.75 percent from 2.25-2.5 percent during the start of the year.

In a surprise move, our very own Bangko Sentral ng Pilipinas (BSP) cut banks’ reserve requirement ratio (RRR) by another 100 basis points in October. This brought total RRR cuts to 400 basis points and should result in P400 billion in additional liquidity for 2019.

Another reason why we were more bullish in the stock market was due to the Philippine Statistics Authority’s latest report that the economy accelerated to 6.2 percent in the third quarter from 5.6 percent during the first and 5.5 percent in the second. It also beat consensus growth forecast of 6 percent.

Gross domestic product (GDP) growth improved as government spending finally picked up, thanks to the passage of the 2019 budget in April after several months of delay. Consumer spending growth also accelerated, thanks to lower inflation that helped boost consumer confidence.

The growth streak is also translating to stronger corporate earnings, which is key to driving share prices higher. Only a handful of companies missed expectations.

Most banks reported better than expected earnings as they benefited from higher trading gains and lower funding costs. Property companies also disclosed double-digit growth in profits, largely driven by higher rental revenues from malls and offices while demand for residential properties remained healthy.

Meanwhile, consumer companies also reported higher profits as they benefited from stronger consumer demand while earnings of telcos were strong as growing demand for data services more than offset the weaker demand for voice calls and SMS.

Most importantly, the United States and China last week agreed to roll back some tariffs. The possible easing of trade tensions should diminish uncertainty and encourage more businesses to pursue investments that were put on hold.

It should also improve sentiment for risky assets, including emerging market equities (such as Philippine stocks) that have suffered from consistent net outflows in the past few months.

Despite all the good news, the Philippine stock market still fell on Friday. It could also remain weak for the rest of November as foreign investors who track the MSCI Emerging Market Index reduce their holdings of Philippine stocks.

Note that the weighting of Philippine stocks in the MSCI Emerging Market Index was once again reduced in MSCI’s latest semi-annual review this November to make way for the larger weighting of Chinese stocks. Nevertheless, since the expected sell-off is not fundamentally driven, the Philippine market should easily recover after the Nov. 27 deadline for compliance.

As such, any weakness in the stock market induced by the rebalancing of the MSCI should be viewed as an opportunity to buy Philippine stocks at a cheaper price since local stocks now look even more attractive given the improving outlook of the domestic and global economy.