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Is this a bull market or a bull trap?

/ 04:08 AM April 20, 2020

What a difference a month makes! Fear has turned into greed allowing the bear market to sharply turn around into a bull market, with the S&P 500 higher by 31.1 percent and our very own Philippines Stock Exchange index (PSEi) up by 43.3 percent from their respective lows in March.

Admittedly, there are reasons to be bullish. After more than two months, the lockdown in Wuhan, China, was finally lifted on April 8. The number of daily new corona virus infections is also peaking globally. This includes cases in countries with a large number of infections, such as the Uni­ted States, Italy, Spain and even the Philippines, as governments around the world take aggressive steps to contain the spread of the virus. Inevitably, this will lead to a drop in active cases and the reope­ning of economies.

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Central banks globally have likewise shown their willingness to do whatever it takes to keep financial markets liquid and support growth once economies reopen. For example, in the United States, the Federal Reserve cut rates by a total of 150 basis points to 0-0.25 percent. It also committed to buy an unlimited amount of bonds (which is more commonly referred to as quantitative easing or QE), and rolled out several programs to boost liquidity of banks and financial markets. In fact, because of the said measures, the Fed’s balance sheet jumped to a record $6.4 trillion as of this writing, well above its peak of around $4.5 trillion in 2017, before it began to unwind its previous QE program.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) has relaxed the rules for banks in recognizing nonperforming loans and in booking provisions against bad debts. It also cut benchmark rates by a total of 125 points and reduced banks’ reserve requirement ratio (RRR) by 200 basis points so far this year to boost liquidity. The BSP also said it would purchase up to P300 billion worth of government securities from the Bureau of the Treasury to support the government’s efforts to fight the impact of the coronavirus disease (COVID-19) pandemic.

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Finally, last week, infectious disease professor Kathleen Mullane in Chicago reported that most patients who were given the drug remdesivir showed rapid recoveries in fever and respiratory symptoms, raising hopes that an effective treatment for the coronavirus will soon be available.

Although there are reasons to be bullish, cautiousness is still warranted in my opinion.

As I have mentioned in my previous column, I don’t think that life will return to normal even after the enhanced community quarantine (ECQ) is lifted and economies reopen. In my opinion, there is a strong likelihood that we will see a “U” instead of a “V” shaped recovery. People will most likely continue to behave differently and act cautiously as long as there is no globally recognized vaccine or treatment for the coronavirus. This means people avoiding public spaces and reducing spending on nonessential items.

According to a consumer sentiment survey conducted by Boston Consulting Group, in the next six months, consu­mers in most countries plan to reduce their spending on a significant number of product and experience categories, far exceeding the number of categories where they plan to increase spending. Leading categories where consumers plan to reduce their spending on include travel, out-of-home entertainment, restaurants, gambling, luxury fashion and public transportation. On the other hand, leading categories where consumers plan to increase their spending on are in-home entertainment, fresh and organic foods, packaged food and beverages, preventive health care and household care products.

In China, where coronavirus infections have already been contained, 87 percent of respondents still say they will change their daily lifestyle because of the virus and 93 percent say they will continue to avoid public spaces. This is despite the 38 percent agreeing that the worst of the virus is over.

Meanwhile, about 70 percent of Filipino consumers said they had no plans to buy durable goods or travel out of town in the next 12 months even after the ECQ is lifted. This is based on the results of Neda’s (Natio­nal Economic and Development Authority) recently conducted consumer sentiment survey, according to Neda Undersecretary Rosemarie Edillon.

Moreover, when economies reopen, the process will most likely be done in phases. During the initial phases, nonessential travel will still be prohibited or discouraged, and venues where people congregate, such as movies and restaurants, will remain closed or will be required to adopt strict social distancing protocols.

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Finally, although there are now therapies and drugs that show promise in treating the coronavirus, it will still take time for studies to prove their safety and effectiveness.

Admittedly, some companies are expected to stay resilient despite the crisis. Some might even benefit. These include retailers of essential goods such as Puregold, manufacturers of shelf stables such as Universal Robina and Century Paci­fic Food, and telcos such as PLDT and Globe. However, the resiliency of these companies is already priced in given the significant outperformance of their stocks recently. In fact, prices of some of the said stocks are now higher than where they were during the start of the year, before COVID-19 became a pandemic.

However, as I’ve mentioned in one of my past columns, the profitability of these resilient companies will also be at risk if the ECQ lasts longer than expected or if our economic recovery stalls. Consumers will eventually run out of money, forcing them to cut back their spending even on essentials. As such, I don’t think these companies deserve to trade at new highs.

A caveat though is that strength begets strength, and as such, I will not be surprised if the stock market continues to go higher for longer. I don’t know how high the market can go and or how long the bull market will last. However, this ongoing bull market will most likely be short lived because it is not supported by fundamentals. Bad earnings results or negative earnings guidance this coming first quarter earnings season will most likely be enough to trigger a change in sentiment from greed back into fear. And those who are aggressively invested are at risk of suffering significant los­ses from this bear trap.

Although there is nothing wrong about profiting from the stock market’s strong performance right now, don’t forget to stay cautious. Lighten on the way up and control your risk by managing your size. For those who have not yet bought stocks, wait for prices to pull back. There will be opportunities to buy stocks at much better prices in the future, when reality sets in. INQ

April Lee-Tan, CFA, is the chief equity strategist of COL Financial, the Philippines’ leading online stockbroker. She has over 20 years of experience covering the Philippine stock market. She heads the COL research team. For her market insights, follow @AprilLeeTan and @colfinancial on Twitter. For comments and suggestions, email [email protected]

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