Will stocks retest 2020 low?

The stock market fell sharply last week as the number of daily new covid-19 cases jumped to more than 5,000. The market reacted negatively as the sharp rise in infections will lead to the tightening of restriction and negatively affect consumer confidence, hurting the Philippines’ economic outlook.

I admit that I did not think we would see a steep rise in infections since we made it past the holiday season without a spike in the numbers of cases.

However, the latest surge might be due to several factors including the presence of new variants, which are said to be more transmissible and the relaxation of some quarantine restrictions.

Coupled with the steep rise of inflation, the Philippine stock market has decoupled from the rest of Asia and is now the region’s worst performing market in 2021. As of last Friday, the Philippine Stock Exchange index (PSEi) was down by 9.85 percent for the year-to-date period, while the MSCI AC Asia Pacific index was higher by 4.3 percent.

Although the local stock market could stay depressed in the near term as the number of infections stay elevated, I do not think we will see the PSEi retesting the 2020 low of 4,600 or going below 5,000 for the following reasons:

Small likelihood of government reimposing ECQ. Despite the record number of daily new cases, the government is not expected to reimpose an enhanced community quarantine (ECQ) which is the strictest form of lockdown, given the negative economic implications. These include a steep rise in unemployment, more companies facing bankruptcy and a higher budget deficit for the government. There are also other less economically damaging ways to control the spread of the virus such as making sure Filipinos practice minimum health standards (mask wearing, social distancing, frequent hand washing), early diagnosis through testing and contact tracing, enforcing localized lockdowns, and accelerating the vaccination process. In fact, during the past week, the government already said it had no plans to reimpose an ECQ even with the record number of infections.

The availability of vaccines. When the World Health Organization declared the covid-19 outbreak as a global pandemic in March 2020, nobody knew when vaccines would be available since historically, it took several years to develop a vaccine. Today though, there are several vaccines being used globally under emergency use authorization. In fact, countries that have inoculated much of their population are seeing hospitalizations and deaths due to covid-19 fall dramatically. Although the Philippines is facing challenges in procuring vaccines and getting them in arms, conditions today are still much better compared to last year as the availability of vaccines will allow economic conditions to return to prepandemic levels faster than if there were no vaccines.

The ongoing global economic recovery. The outlook of the global economy is much better today than it was last year when the whole world was locked down to control the spread of the virus. Today, most countries are reopening their economies after successfully controlling the spread of the virus—either through traditional means or mass inoculations. According to Bloomberg’s survey of economists, the median global GDP growth forecast is now at 5.6 percent, up from 5.2 percent as of September last year. The improving outlook of the global economy should benefit the Philippines through higher overseas Filipino workers remittances, exports and more business process outsourcing jobs.

Low valuation of stocks. At 6,436, the PSEi index is now trading slightly below its 10-year historical average P/E ratio. Moreover, 24 out of the 30 stocks that are part of the index are trading at a significant discount relative to their own 10-year historical average P/E ratios, with some even trading below their book values. Although the Philippines’ near-term economic outlook is poor, the stock market is not pricing in anything better given stocks’ weak year-to-date performance and below average P/E ratios.

Admittedly, stocks could stay depressed until the government successfully controls the number of infections. After all, being cheap is not a good enough reason for stock prices to move higher. However, every crisis creates opportunities and stocks would not trade at such a cheap valuation if there were no problems. Consequently, the market’s prevailing weakness is an opportunity for patient investors to make money over the long term. Just make sure to manage your risk by buying slowly, so that you can average down in case prices go lower, and by using long-term funds, so that you can hold on to your position in case it takes time for the stock market to recover.