Why a hawkish Fed shouldn’t worry stock investors
Investors in the Philippine stock market are understandably worried about a more hawkish Fed that will be aggressively increasing interest rates this year.
In 2013, when the Fed first hinted that it would soon end its quantitative easing or bond buyback program, the Philippine market along with other global markets suffered from the taper tantrum.
From its peak in May, the PSEi index fell by as much as 25 percent in a span of seven months before turning around. In 2018, the Philippine stock market together with other emerging markets suffered from foreign fund outflows as the Fed raised interest rates by a total of 100 basis points, making dollar assets more attractive. This coupled with other reasons caused the PSEi index to fall by as much as 24 percent in a span of five months during the said year.
Although the Philippine stock market is showing signs of volatility again due to expectations that the Fed would soon end its bond buyback program and raise rates by a total of four times this year, I don’t expect a repeat of the 2013 or 2018 Fed induced sell-offs due to three major differences.
The Philippine market today is not as strong as it was in 2013 or 2018.
Last year, the PSEi index was down by 0.2 percent. In contrast, the PSEi index was up by around 25 percent in the first few months of 2013, prior to the beginning of the taper tantrum in May. The PSEi index was also up by 40 percent from its 2016 low before the sell-off began in early 2018.
Valuations of stocks today are also much cheaper compared to what they were in 2013 and 2018. The PSEi is currently trading at only 16.5X P/E. In contrast, the PSEi was trading at 21.7X P/E in May of 2013, and 20X P/E in early 2018.
Finally, foreign investors are currently heavily underweight in the Philippines. This is evidenced by their consistent selling of Philippine stocks since late 2019. In contrast, foreign investors were consistently buying Philippine stocks for four years prior to the May 2013 taper tantrum. They were also very bullish on Philippine stocks before 2018 due to the Philippine economy’s strong performance and the impending passage of the tax reform for acceleration and inclusion or TRAIN law.
Because of these, I don’t expect to see a repeat of the 2013 and 2018 induced sell-off this time around. In fact, while the S&P 500 in the US is down by 7 percent for the year-to-date period, the PSEi index is up by 1.8 percent so far this year.
Although there could be some volatility in the short term, we should view this as an opportunity to buy stocks at cheaper prices. After all, the local economy is finally reopening as vaccination rates are increasing. This should drive faster economic growth as evidenced by the stronger-than-expected fourth quarter GDP, which in turn should help corporate earnings recover.
At the end of the day, earnings matter most in the stock market and investors who bought stocks during these difficult times will be rewarded.
