Don’t go chasing after stocks just yet

The stock market performed strongly last week, with the Philippine Stock Exchange index rising by almost 10 percent week-on-week. Foreign investors also turned into net buyers after consistently selling Philippine stocks most of the year.

The main catalyst for the stock market’s strong performance is the improving number of COVID-19 infections in the country. After hitting a peak of more than 6,000 in early August, the number of daily new cases has been on a downtrend and consistently below 3,000 since the start of October. This paved the way for further relaxation of quarantine restrictions which is good for the economy. For example, the government recently shortened curfew hours in the National Capital Region. It also lifted the ban on nonessential foreign travel, and foreigners with visas will soon be allowed to enter the country. Hotels in areas under general community quarantine (GCQ) and modified GCQ are also now allowed to operate at full capacity.

Although the stock market’s strong performance is very much welcome, I don’t think we can expect the market to go up smoothly.

Last week, Puregold warned that sales for the whole year might be flat. This is despite the 15-percent growth in first half sales, implying that sales for the second half of the year might drop by some 13 percent. The company said sales were expected to weaken in the second half because of the absence of pantry stocking and government relief programs, a high level of unemployment and weak gross domestic product (GDP) numbers.

Also last week, URC disclosed that its domestic sales fell by 2 percent in the third quarter, which was worse than the 1 percent increase in second quarter. Sales were also lower by some 3 percent than second-quarter level.

URC’s weaker third quarter sales came as a surprise since the worst should have already been over in the second quarter. However, URC shared that according to the Nielsen Retail Index, sales volume of fast-moving consumer goods in most retail channels fell by a much faster pace in July and August compared to the second quarter. URC’s sales would have been much worse if they did not grab market share from their competitors.

Although the relaxation of quarantine restrictions will help the economy recover, the latest disclosures made by Puregold and URC seem to imply that the pace of recovery is slow and that it will take time before the economy returns to prepandemic levels. After all, both consumer confidence and business confidence are weak. And unlike developed economies, the Philippine government does not have a massive stimulus program to help boost consumer spending and economic growth.

There is also a possibility that despite the relaxation of restrictions, economic activity in the fourth quarter will still be significantly weaker compared to last year. Aside from the high base in 2019, most companies are implementing cost-cutting measures and are expected to reduce their budgets for giveaways. Moreover, the government is still banning Christmas parties to avoid the spread of coronavirus, which means less spending on food and entertainment. Finally, a lot of companies already distributed employees’ thirteenth month pay in the second quarter, when most of the country was under enhanced community quarantine and employees could not report to work.

In short, the strong performance of the stock market which is fueled by hope that falling COVID-19 infections would lead to a strong economic recovery is vulnerable to a sell-off if the government announces weaker than expected GDP numbers, or if corporate earnings disappoint. Because of this, there is no point in chasing after stocks. In fact, it might be wise for those who already own stocks to reduce their positions by locking in some gains and to just buy back stocks when prices return to more attractive levels. INQ