Why I’m bullish and bearish at the same time

The Philippine stock market has been very volatile lately. Having experienced several bull and bear markets, I feel conflicted, both fearful and greedy at the same time.

While bear markets provide investors with the best opportunity to make a lot of money, the sharp drops in prices are very scary, causing us to doubt the wisdom of our decision to buy stocks. After all, during bear markets, there is an abundance of bad news. And just because a stock is cheap, doesn’t mean it can’t become cheaper.

Why I’m bearish

By definition, the Philippine stock market is now in bear market territory. The Philippine Stock Exchange index (PSEi) is down by more than 20 percent from its peak of around 9,100. The long-term uptrend has been broken.

And although a bear market is unwarranted fundamentally speaking, experience has taught me that we can still suffer from a contagion-driven bear market, similar to what happened in 2008. At this point, most global markets, including the US market, are trading at bear market territory if they are not already suffering from a bear market. This makes it difficult for the Philippines to stand out and remain strong despite having better fundamentals.

If we were to see a repeat of the 2008 Global Financial Crisis, it would take the PSEi 12 months to hit the bottom, which is 56-percent down from the peak. The good news is, it’s been 26 months since we hit the peak in January of 2018. The bad news is, the PSEi is only 36.2-percent down from the peak, implying that it could still go down.

Moreover, given how the number of coronavirus infections is still growing, the crisis seems far from over. As such, first and second-quarter economic indicators and corporate earnings results would most likely be weak. Consequently, sentiment for stocks would most likely stay depressed during the next few months.

Why I’m bullish

On the other hand, the negative impact of the coronavirus outbreak on the global and local economy should only be temporary as the problem would most likely be resolved eventually, similar to other epidemics and pandemics of past.

If we take SARS (severe acute respiratory syndrome) for example, the epidemic was resolved in eight months by July 2003.

Because of the steep sell-off during the past few weeks, Philippine stocks are trading at dirt cheap valuations. At 5,793.94, the PSEi is currently trading at only 11.6X price-to-earnings ratio (P/E), way below its five-year historical average P/E of 17.3X, thus implying two things: 1.) Negatives are already priced in. Although profits are expected to weaken this year due to the coronavirus outbreak, the market is already pricing in at least a 28-percent drop in earnings. The last time profits were at this level was in 2016.

2.) There is almost a 100-percent probability that investors who buy stocks today will make money in the future. This is based on the assumption that valuations will eventually normalize, although of course, nobody knows when this will happen.

Moreover, at current pri­ces, several companies already have dividend yields that are at par or above the Philippine 10-year bond yield of 4.4 percent. These include D&L (DNL) at 4.4 percent, Aboitiz Power (AP) at 4.6 percent, Globe (GLO) at 5.9 percent and PLDT (TEL) at 7.6 percent. The high dividend yields of these companies give investors another reason to buy their stocks as they are paid to wait for prices to turn around.

Finally, numerous companies are buying back their own stocks. This shows that the owners are confident about their company’s fundamentals and that their stocks’ valuations are too cheap. Since the start of year, the following companies have announced share buyback programs—Ayala Land (ALI), MPI (MPI), Megaworld (MEG), Robinsons Retail (RRHI), Max’s (MAXS) and Megawide (MWIDE).

Should I buy or sell stocks today?

The answer to the question “should I buy or sell stocks today?” depends on several factors.

If you are a short-term trader, there could be an opportunity to make money from an oversold rally given how sharply the market has dropped in such a short amount of time. However, you might not be able to consistently make money by trading stocks right now since the general trend is against you. Therefore, active trading is not ideal.

If you already own stocks today, there’s no need to panic. You should just stay invested as prices will surely go higher eventually. This is unless you are too heavily invested or have borrowed money to buy stocks. In that case, it would be wise to sell some stocks to reduce your exposure to a more comfortable size that will allow you to sleep well at night.

If you are not yet invested, now is a good time to start since it’s a buyer’s market where you can buy stocks very cheaply. However, since the trend is down, buy slowly to improve your buying price. You can buy a little every month or adopt a peso cost averaging strategy as the market will most likely stay depressed for a while. Also, keep your size small so that you can withstand the market’s volatility. When picking stocks to buy, stick to larger cap blue chip stocks and companies that are engaged in more defensive businesses, which are not highly regulated. These companies will most likely outperform given that they are less vulnerable to economic slowdowns.

Stocks that should be more resilient during these difficult times include nondiscretionary consumer stocks like URC (URC) and Puregold (PGOLD), telcos like PLDT (TEL) and Globe (GLO) and power generation companies like Aboitiz Power (AP) and First Generation (FGEN). Among the said stocks, TEL, GLO and AP also provide attractive dividend yields making them even more compelling to buy. You can also choose to buy an index fund, which is already diversified and easier to buy, especially if you only have a small portfolio. INQ