Why the PSEi can break above 7,000

The PSEi index is once again flirting with the 7,000 level. After a failed attempt in June, will it finally break above the said resistance level, allowing the stock market to end 2021 higher compared to last year?

Despite the challenges still facing the Philippine economy, there is a stronger likelihood of a breakout happening this time around because of the following reasons:

Peaking of infections in other Asean (Association of Southeast Asian Nations) countries—While other Asean countries were in the middle of their Delta variant surges in June, daily new cases in Thailand, Indonesia, Malaysia and Vietnam have already peaked and are now on their way down.

Although it is not yet clear if the number of daily new cases in the Philippines has already peaked, the good news is, the reproduction rate is already falling, which is an indicator that cases will peak sooner rather than later.

The falling number of daily new cases in Asean should help boost sentiment for stocks in the region, which is good for the Philippine stock market.

A more dovish Fed—During the Jackson Hole Economic Policy Symposium in August, US Fed Chair Jerome Powell said that even though the central bank could start reducing the pace of its $120-billion a month asset purchases this year, it won’t automatically raise interest rates soon.

According to Powell, the Fed will continue to hold federal funds rate at current levels until the economy reaches maximum employment and until inflation reaches 2 percent and shows signs of moderately exceeding 2 percent on a sustainable basis.

Powell’s more dovish than expected remarks is good for emerging markets as it diminishes the threat of a significantly tighter US monetary policy soon. This, in turn, will reduce the likelihood of a repeat of the 2013 taper tantrum, which led to a steep decline of the

Philippine stock market, a sharp rise in interest rates and the depreciation of the peso.

Tightening regulations in China—In an effort to achieve “common prosperity” and to strengthen the legitimacy of communist party rule, the Chinese government has been implementing tighter regulations recently, negatively affecting numerous industries such as technology, education, gaming and entertainment.

Due to uncertainty on what industries would be targeted next, and when the policy changes would end, global fund managers are reducing their exposure to China and are instead looking at other emerging markets.

Because of this, we could see foreign funds returning to the Philippines. Note that recently, we are seeing more foreign buying of Philippine stocks compared to earlier this year.

The reopening of the economy—Despite the elevated number of daily new cases, the government loosened quarantine restrictions in Metro Manila, adopting a new pandemic alert level system where alert levels would be adjusted depending on the number of cases. Lockdowns would also be more granular, allowing more businesses to remain open despite the elevated number of infections.

The loosening of mobility restrictions is good given the negative impact of lockdowns on the economy. According to Socioeconomic Planning Secretary Karl Chua, the Philippine economy loses at least P105 billion every week it is under a strict lockdown. The government also no longer has funds to assist businesses and individuals who are negatively affected by the lockdowns.

The improving outlook for the economy resulting from the loosening of quarantine restrictions is good for the stock market as earnings outlook of businesses also improves, benefiting shareholders. INQ