Global equity markets fell last week, and the Philippine stock market was not spared. The selloff was triggered by the emergence of a more transmissible variant, Omicron, and the growing likelihood that the US Fed would withdraw monetary stimulus at a faster pace than expected.
Despite the said developments, I am maintaining my positive view on the stock market.
Although Omicron is more transmissible, all reported cases are mild so far. If the new strain is proven to cause only mild symptoms, the threat of overwhelming the health-care system is minimal, even if the number of cases go up. This would reduce the need for government to tighten mobility restrictions anew.
Admittedly, it is still too early to assume that the new variant is less severe compared to all other variants. It also won’t come as a surprise if the Philippine government raises alert levels once it confirms that Omicron has reached our shores just to be on the safe side.
However, both the government and the private sector are now in a better position to cope with another possible surge, reducing disruptions to the economy. For example, lockdowns are now more granular instead of city-wide. The government is also allowing more businesses to remain open, likewise with public transportation. Most companies also now have a playbook on what to do under different scenarios.
The economy’s growing resilience is evident in the country’s third quarter gross domestic product, which increased by 7.1 percent year-on-year and 3.8 percent quarter-on-quarter on a seasonally adjusted basis. The said growth was achieved despite the country being in the middle of the Delta surge, surprising most economists.
Finally, stocks are not yet fully pricing in a recovery.
Although share prices have rebounded from their lows, most companies are still trading significantly below their historical average price to earnings multiples. Most are also trading below their book values as investors are not yet willing to pay higher prices due to concerns that earnings would stay weak in the near term. Thus, negative economic surprises should not have a permanent impact on share prices because investors are not expecting much.
Meanwhile, although there is a growing likelihood that the US Fed would raise interest rates soon after considering the possibility of ending its bond buyback program ahead of schedule, we don’t expect to see a repeat of the 2013 taper tantrum which resulted in a steep drop in stock prices, a sharp increase in interest rates and the depreciation of the peso.
Unlike in 2013 when the Fed suddenly announced plans to taper its support for the bond market, the Fed this time around has given clues much earlier. What came as a surprise is the pace at which it would end its support as the market was expecting the US central bank to end its bond buyback program in June.
Moreover, the Philippine market today is not as strong as it was in 2013. Prior to last week, the PSEi (Philippine Stock Exchange) index was up by only 2 percent for the year-to-date period and was still around 6 percent below its end-2019 level.
Investor sentiment is currently also very weak. Although the market is now significantly higher compared to its March 2020 low, foreign investors are largely absent. In fact, they have been consistent net sellers since the middle of 2019.
In contrast, the PSEi index was higher by around 25 percent for the year-to-date period in May of 2013 when the taper tantrum began. Investor sentiment was also very positive, as foreign investors were consistent net buyers of local stocks for four years.
Finally, even if the Fed starts raising interest rates early next year, these are expected to remain low and conducive for growth. At this part of the cycle, the Fed’s objective is to normalize interest rates after cutting it aggressively because of the pandemic.
Higher rates are not expected to hurt corporate earnings growth as the Fed is not trying to cool down an overheating economy.
For the said reasons, I remain bullish on the stock market. Any selloff should be viewed as an opportunity to accumulate stocks at cheaper prices. INQ