Panic selling is not the right strategy

The stock market suffered from a bloodbath this June, with the PSEi index down by 8.2 percent for the month-to-date period. The main catalyst for the market’s sell-off was the continuous increase in inflation globally, which prompted the US Fed to act even more aggressively.

The inflation rate continued to shoot up in May, with inflation in the US accelerating further to 8.6 percent from 8.3 percent in April. This was despite the Fed already increasing interest rates by a total of 75 basis points earlier this year.

Because of the stickiness of inflation, the Fed turned even more hawkish, raising the rate by another 75 basis points during its recently concluded meeting. The benchmark rate is also projected to end the year at 3.4 percent, based on the “dot plot” of Fed members’ expectations, significantly higher than the previous estimate of 1.9 percent and consensus expectation of 2.6 percent. Finally, the Fed reduced its 2022 GDP growth forecast for the United States from 2.8 percent to 1.7 percent.

The aggressiveness of the Fed and its more conservative growth guidance were largely responsible for the selloff of US stocks. Note that the US’ S&P 500 and Nasdaq indices fell by 5.3 percent and 3.9 percent in June and are now both in bear market territory. This in turn had a spillover effect on global equities and other asset classes including Philippine stocks.

Although prevailing market conditions make it tempting to sell first and ask questions later, panic selling is not the right strategy. After all, bear markets create opportunities for investors who are cash rich to buy good companies at very cheap prices.

Most Philippine listed companies, including large cap favorites such as SM and the Ayalas, are now trading below their historical average P/E multiples. Some stocks are even trading below their book values, which means that the market is pricing these companies below the acquisition cost of their assets and the value of their accumulated profits.

Economic conditions in the Philippines are also much better compared to the United States. Despite rising inflation, I don’t think we are at risk of entering into a recession.

One of the reasons why the United States is at risk of a recession is that the economy was overstimulated by the aggressive fiscal and monetary policies that were implemented to counter the impact of the pandemic. Moreover, the United States, reopened earlier than most economies as it had access to vaccines ahead of most countries. These two factors were responsible for pushing up demand, which in turn was also responsible for pushing up prices.

In contrast, the Philippines only started reopening late last year. And while our government also stimulated the economy in response to the pandemic, the magnitude of our “ayudas” and rate cuts were much lower compared to the United States. Moreover, our banks tightened their lending policies during the pandemic, limiting the impact of our central bank’s lower interest rates on the economy.

Cheap valuations coupled with the Philippines’ still favorable economic outlook have prompted many local companies and insiders to buy back shares. This is even as the market is being sold down.

There are also signs that commodity prices are peaking as high prices and rising interest rates are already leading to demand destruction. For example, oil is down 15.5 percent from its peak of $123.7 per barrel, while the industrial metal copper is down by 3.3 percent for the year-to-date period. Even the price of wheat is 32.5 percent lower than its peak level even though there are no signs that the war in Ukraine will end soon.

The main risk to buying stocks today is that the market could still go down. It will also take time for prices to recover.

To manage these risks, buy stocks slowly, since no one knows when the market will bottom. Also, invest only an amount that you are confident that you will not need in the next few years, so that you will not be forced to sell, even if the market takes a long time to recover. INQ