Together with other global markets, the Philippine stock market fell sharply last Friday, with the PSEi index falling by 2.2 percent. This followed the news that January inflation in the US jumped to a fresh 40- year-high of 7.5 percent, raising concerns that the Federal Reserve would increase interest rates more aggressively this year, by as much as 50 basis points in March and by a total of 175 basis points for the whole year!Nevertheless, I would like to reiterate my view that sell-offs are opportunities to buy Philippine stocks at cheaper prices. Here are the reasons why I remain positive on the local stock market.
Improving outlook of the Philippine economy
While I have already been optimistic about the Philippines’ 2022 economic outlook since late last year, the faster-than-expected fourth quarter GDP growth of 7.7 percent made me even more optimistic. Growth surprised positively due to the acceleration of consumer spending growth from 7.1 percent in the third quarter to 7.5 percent in the fourth quarter, thanks to the sharp drop in the number of COVID-19 cases, which allowed the government to significantly reduce quarantine restrictions.
With rising vaccination rates, there is a strong likelihood that the government will further reopen the economy this year, which I believe will allow the economy to recover faster.
Note that economists are forecasting GDP growth to reach 6.5 percent this year, allowing the Philippine economy to return to prepandemic level in the second half.
US inflation showing signs of peaking?
Despite the sharp increase in US inflation, there are indications that it could peak soon as demand is showing signs of weakness. For example, the University of Michigan consumer sentiment index has been deteriorating since the middle of last year. In fact, the February figure is the lowest in more than a decade as high prices and the falling stock market are hurting consumer sentiment.
Both the ISM manufacturing and nonmanufacturing indices are also weakening, with the ISM manufacturing index reading in January pointing to the weakest growth in factory activity since September of 2020.
Coupled with the reopening of the global economy, the slowdown in demand should help control inflation in the United States, reducing the pressure for the Fed to raise rates significantly.
US market historically went up even with higher rates
Since the 1990s, the US market managed to go up even as the Fed began its tightening cycle. This as corporate earnings recovery during the early part of economic cycles more than offset the negative impact of higher funding costs.
For example, from end-December 1993 to end March 1995, the S&P 500 increased by 7.3 percent even as the Fed raised rates by a total of 300 basis points. Meanwhile, from end-May 2004 to end-June 2006, the S&P 500 rose by 13.3 percent despite the 425-basis-point increase in Fed fund rates. Finally, from end- November 2014 to end-2018, the S&P 500 jumped by 21.8 percent even with the 225-basis-point increase in Fed fund rates.
Philippine stocks are cheap and underowned
While global equity markets including the US market are falling this year due to concerns of a more aggressive Fed rate hike, the Philippine stock market is outperforming. In fact, even with last Friday’s correction, the PSEi index is still up 2.1 percent for the year-to-date period. In contrast, the S&P 500 in the United States is down by 7.3 percent.
Aside from the Philippines’ improving economic outlook, the main reasons for the stock market’s outperformance are cheap valuations and stocks being underowned by foreign investors.
For example, based on COL Financial’s estimates, around 75 percent of index stocks are still trading below their 10-year historical average P/Es. Many are also trading below their book values despite minimal risk of bankruptcy. Moreover, foreign investors have been consistent net sellers of Philippine stocks since the middle of 2019 and probably don’t have much to sell anymore.
Because of these reasons, I recommend buying Philippine stocks if they go down due to concerns of a more aggressive US Fed rate hike. Although the ongoing volatility is worrisome, it is important to take away the noise and to analyze the data objectively so that we can capitalize on the opportunity created by panic sellers. INQ