Economic worries may temper ‘Santa Claus rally’

The local stock market has entered the final month of the year uncertain of whether it will experience the traditional holiday season runup, given lingering concerns in the eurozone and disappointing local economic prospects.

While the Philippine Stock Exchange index has surged over the last two years, this year has been a roller-coaster ride and, with only a month to go, the main barometer is clinging to very slim gains from the end-2010 level of around 4,200. Before the market’s mid-week break, the index closed at 4,211.04 on Tuesday.

“We’re hanging on thin air,” AsiaSec Equities chief strategist Manny Cruz said in an interview.

The first week will be critical as the European Union is meeting on December 8-9 to discuss the region’s woes, Cruz said, adding that everyone was concentrating on the yield and prices of European bonds and the EU’s policies in response to the turmoil.

“If this brings about positive sentiment, then we will see a ‘Santa Claus’ rally,” Cruz said. “Otherwise, it will pull the market down, especially since the Philippine market has been one of the best-performing in the region.”

Cruz said he was worried because the Philippines had turned out to be one of the poorest in terms of economic projection and attainment, which meant that it could be vulnerable to another wave of foreign selling if external conditions deteriorate. Other markets in the Asia-Pacific were already down by an average of 15-17 percent so far this year.

The government announced on Monday that the domestic economy had expanded by 3.2 percent, slower than the consensus forecasts of over 4 percent. On a seasonally adjusted basis, the domestic economy grew by 0.3 percent, likewise much slower than market expectations of 1.3 percent growth.

Cruz estimated there was still about P5 billion in net foreign money remaining in the stock market, which could flow out for the remainder of the year if nothing good comes out of EU’s attempt to help debt-strapped members.

“Everything boils down to Europe, then a secondary [concern] is the Philippine economy,” Cruz said.

If things turn out better in EU, Cruz said the critical resistance to watch would be 4,413 which he described as a very strong barrier. The next one would be 4,456, he said.