What do you do when analysts have different opinions on the stock market that are at odds with each other?
Fundamental analysts like me will say it is now undoubtedly a great time to buy stocks in the Philippines.
The country’s economic growth outlook is very attractive as the government plans to ramp up infrastructure spending. Moreover, inflation is benign and interest rates are low. Fitch Ratings also recently affirmed its BBB rating on the country and upgraded its outlook to positive from stable, bringing us one step closer to an A rating.
Issues that were hurting investor sentiment earlier this year are also slowly being resolved. For example, the worst is over as far as Taal Volcano is concerned with the Philippine Institute of Volcanology and Seismology recently reducing the alert level to 2 from a peak of 4, diminishing the likelihood of a massive eruption that can disrupt the operations of several companies with facilities near the area.
Regulatory risk has also diminished. ABS-CBN will most likely be allowed to resume operations after congress last Feb. 27 sent a letter to the National Telecommunications Commission enjoining the latter to grant ABS a provisional authority to operate until congress decides on its franchise renewal application.
Valuations are also very attractive. The Philippine Stock Exchange index (PSEi) is currently trading at 13.3X 2020 P/E, which is more than two standard deviations below its five-year historical average P/E of 17.2X, while 90 percent of all index stocks trading below their 10-year historical average P/Es. This means that assuming the PSEi performs the same way it did in the past, there is almost a 100-percent probability that investors who buy stocks today will make money in the future.
Although global markets are being sold down on concerns that COVID-19’s impact on the global economy will be much worse and far reaching than initially expected (this after the number of cases in South Korea and countries further away such as Italy and Iran surged in a short span of time), the impact is only temporary similar to other epidemics such as SARS in 2003. As such, the ongoing sell-off creates an opportunity for value investors to buy stocks at bargain prices.
However, technical analysts will say that it is now a bad time to buy stocks.
The PSEi is undoubtedly in a down trend as it has broken all the major moving averages. In fact, the index is officially in bear market territory after the PSEi broke below 7,250. Market breath is also negative, with 10 out of the 30 index stocks trading at new 52-week lows and none trading at new 52-week highs.
The sell-off is also probably not yet over since the US market, which has so far been one of the most resilient equity markets in the world, is just beginning to fall. Last week, the S&P 500 lost more than 10 percent in just five days. And unfortunately, when the US market sneezes, everyone catches a cold.
To know what to do when fundamental and technical analysts are at odds with each other like today, understand that fundamental analysis is most useful in identifying stocks that have good odds of going up or going down. In contrast, technical analysis is more useful in identifying the best entry and exit points. However, both technical and fundamental analysis can not identify when and where the market will bottom with 100 percent certainty.
Fundamental analysts are correct in saying that investors who buy stocks today have a good chance of making money. However, because the technical picture is bad, there is a strong possibility that prices of stocks can still go down before they go up. In that respect, technical analysts are correct in recommending that investors avoid the market for now.
However, there is a way to capitalize on the strength of both disciplines in today’s market. Here are some tips on how you can do it.
1. Don’t trade the market. Unless you are a professional trader, it would be wise to avoid trading the market. As the saying goes, “the trend is your friend.” Since the trend is going down, traders who buy stocks today face a greater likelihood of loss.
2. Have a long term perspective. Although Philippine stocks are very attractive fundamentally speaking, they are probably not yet going to go up sustainably based on technical analysis. Therefore, investors who buy stocks today have to be prepared to hold on to their positions for the long term.
3. Limit your exposure. Buy only enough stocks that you know you can afford to keep invested for a long period of time. Don’t invest money that you will need in the next few months or years. Otherwise, you might be forced to sell at a loss and miss out when the market finally turns.
4. Stagger your purchases. Remember that since the trend is going down, it’s a buyers’ market. Therefore, you can stagger your purchases over several months. In fact, you can lower your target buying price to improve your average cost. You can also choose to keep a certain portion of your portfolio in cash and finish your buying when the market’s technical picture improves.
5. Stick to blue chips. When picking which stocks to buy, stick to the larger capitalized more liquid blue chip stocks. When everything is cheap, professional fund managers will prioritize more established names, and as such, blue chip stocks are expected to go up faster compared to the rest.
With these tips, I hope you can successfully employ both fundamental and technical analysis, not only to survive these challenging times, but also to successfully make a lot of money in the stock market.