How fast will the economy and the stock market recover?
One of the main points of discussion among market players today is the shape of the recovery, post coronavirus disease (COVID-19) pandemic.
Earlier in March, I was in the camp that thought that the Philippines would have a “V” shaped recovery. Although I recognized that the economy would take a hit as consumers and businesses were abruptly forced to stop spending, I thought that the enhanced community quarantine (ECQ) would succeed in containing the spread of the virus and that everything would return back to normal once the ECQ was lifted. After all, China was able to contain the spread of the virus in a few weeks’ time. Although there could be some delays, the ECQ would surely be lifted in a few months at worse, which is relatively quick compared to the amount of time it takes to resolve a financial crisis. Recall that it took a long time for affected economies to recover from both the Asian financial crisis in 1997 and the global financial crisis in 2008 because end user demand needed to catch up to absorb the excess capacity that was built leading to the crisis. It took developers time to sell their inventory of houses and condominiums while weaker companies had to close shop or sell out to much stronger competitors. Besides, the Philippine government now has a very aggressive fiscal stimulus program to address the ongoing COVID-19 crisis and that should help the economy get back on its feet.
However, the more I’m learning about COVID-19, the less confident I am that the Philippines will have a “V” shaped recovery.
One of the reasons why I now think that the Philippines will have a “U” shaped recovery is that different countries around the world are at varying stages of the COVID-19 infection cycle. For example, as of today, China is already in the recovery phase, while South Korea has successfully contained the number of infections through massive testing and isolation. Italy has already seen the peak in terms of the number of daily new cases, but the number of active cases continues to rise as recoveries have yet to overtake the number of daily new cases.
However, most countries including the Philippines have yet to hit the peak as the number of daily new cases continue to increase. Coupled with the varying approaches chosen to contain the spread of the virus, different countries will also most likely have varying timelines in containing the virus’ spread.
As such, even if we succeed in containing the number of COVID-19 cases in the Philippines in the next few weeks, the government will most likely remain cautious to avoid a relapse. Our borders will most likely remain closed to visitors. Other countries will also most likely keep their borders closed for the same reason. Note that Singapore and Japan, which have so far successfully contained he spread of the virus, recently enforced greater restrictions on people entering their countries. Consequently, even after the ECQ is lifted, it will take time for our tourism industry to recover. Overseas Filipino workers (OFWs) who are now back in the Philippines will also have to wait longer before they can return to work. This would have a significant impact on the economy as the tourism industry accounts for about 13 percent of gross domestic product (GDP)while OFW remittances account for some 10 percent of GDP.
Another reason why I’m now expecting a “U” instead of a “V” shaped recovery is because as long as there is still no treatment or vaccine for COVID-19, people will most likely remain cautious and continue to practice social distancing measures to avoid getting sick. This would mean people staying away from malls, eating at home instead of restaurants, and avoiding places where there are a lot of people. Moreover, Filipinos who lost their income because of the ECQ will most likely be less confident to spend even after the ECQ is lifted. The resulting drop in consumer spending would inevitably lead to slower economic growth.
Finally, if the COVID-19 pandemic lasts much longer, companies that are vulnerable to the pandemic (such as airlines and hotels) and those that are financially weak will cut costs by laying off workers. As more companies announce layoffs, consumer confidence and spending will deteriorate due to increasing concerns of job security. This in turn will discourage businesses from expanding. The government would then need to spend more to support the economy by bailing out vulnerable businesses and giving jobs to the unemployed to break the vicious cycle.
Nevertheless, even with my more subdued outlook, I still think that now is a good time to buy Philippine stocks. This is because the negatives are largely priced in, with all stocks that are part of the Philippine Stock Exchange index (PSEi) now trading at a steep discount to their historical average P/Es. In fact, the PSEi is now down 40 percent from its peak of around 9,100, while stock that are part of the index are down by 54 percent on average.
Moreover, although there could be some delays, I remain confident that the Philippine economy will eventually recover from this crisis and reach even greater heights because of numerous factors working in our favor including our country’s young population and the government’s stronger financial position. Note that the median age of Filipinos is only 25.7 years old, which means that there is a greater chance that many of those who contract the virus will recover. Meanwhile, the government’s debt to GDP ratio is now only 41.5 percent, down from 54.7 percent in 2008, giving it more room to increase spending to support the economy. For example, the government recently passed the Bayanihan Heal as One Act, which promises to give over 18 million households P5,000 to P8,000 a month for the next two months. Health professionals who contract the virus will get P100,000 while the families of those who die from the virus will get P1 million.
However, since the shape of the Philippines’ recovery from the COVID-19 outbreak will most likely be “U” instead of “V,” the recovery will take longer. As such, it will also take time for the stock market to recover. Consequently, we can take out time when buying stocks. Buy slowly instead of buying all at once. Moreover, don’t chase prices. Finally, we should limit the size of our investment to an amount that we can afford to keep since we must wait a while for prices to recover in a sustainable basis. INQ
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