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Still cautious despite the market’s strength

The market continued to perform strongly in June, with the PSEi rising by another 6.3 percent month-onmonth to end the first half of the year at 6,207.72. This brought total gains from the March 19 low of 4,623.42 to 34.3 percent.The stock market’s strong performance in June was largely due to optimism that the worst was over as the curve had flattened globally. Here in the Philippines, most provinces recently graduated from the strictest level of lockdown or the enhanced community quarantine (ECQ) to the general community quarantine (GCQ). This allowed more businesses to resume operations as restrictions were eased.However, despite the improving outlook of the economy, I still believe cautiousness is warranted.

Although the economy has started to reopen, there are still numerous restrictions in place. For example, under GCQ, businesses which involve mass gatherings (ex. gyms, cinemas) remain closed. Many businesses that are allowed to reopen under GCQ can only operate at 30 to 50 percent capacity. The availability of public transportation remains limited, making it difficult for employees to return to work and businesses to operate normally. Coupled with changes in consumer behavior and the need to practice social distancing measures, these restrictions make it difficult for economic activity to return to normal levels. The continuous increase in the number of COVID-19 infections also prevents the government from further reopening the economy. For example, after graduating from ECQ to GCQ in early June, the NCR cannot seem to graduate to the less restrictive modified GCQ or MGCQ. Meanwhile, after graduating to GCQ in early June, Cebu was once again placed under ECQ starting June 16 and remains under ECQ today due to the growing number of COVID-19 infections.

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The elevated number of infections is also hurting consumer confidence as it makes people fearful of going out. This further dampens consumer spending, slowing the pace of economic recovery.

It is not surprising then that economic managers are becoming increasingly concerned about the economy. For example, in its June 25 meeting, the BSP surprised the market by announcing another 50-basis point cut in key rates. This is despite already cutting rates by a total of 125 basis points and banks’ reserve requirement by 200 basis points earlier this year. According to the BSP, it cut rates further to help mitigate the downside risk to growth and to boost market confidence brought about by measures to slow the spread of the virus and the deteriorating global economic outlook. Meanwhile, in response to the latest announcement that Manila will remain under GCQ, Finance Secretary Carlos Dominguez said he was encouraging President Duterte to loosen restrictions and to put Metro Manila under MGCQ as quickly as possible so that people could start working. He believes that putting Metro Manila under MGCQ will help to reignite the economy. After all, a weaker economy would negatively affect government’s revenue collection and lead to a larger budget deficit.Another reason to be cautious is the second wave of infections happening in the United States. Note that the number of daily new COVID-19 cases in the United States is now over 50,000, up from 30,000 to 40,000 in April. This is not good as it will force more states to either stop reopening or to impose more restrictions, dampening the pace of the United States’ economic recovery. It could also act as a catalyst ending the United States market’s strong performance which was largely responsible for the global stock market’s strong performance in the past three months. Finally, the PSEi is currently pricing in a strong economic recovery which is too optimistic in my view. At its end June close of 6,207.72, the PSEi is trading at 17.4x P/E, which is at par with its 10-year historical average P/E. If economic indicators such as the second quarter GDP growth or corporate earnings results disappoint, there is room for the market to be sold down given its expensive valuation.

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For the said reasons, I am maintaining my cautious view on the Philippine stock market. Although the worst is over, it is not yet time to start buying aggressively because economic activity is not expected to recover sharply anytime soon, and valuations of stocks are expensive. As such, investors can afford to be patient and to wait for prices to go down to more attractive levels before buying stocks. INQ

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