Buy the dip

After rising by as much as 13 percent since the middle of June, the stock market has once again corrected with the PSEi index now back at the 6,600 level.

There were several catalysts for the market’s weak performance lately. Interest rates are rising anew, with the Philippine 10-year bond rate now at 6.6 percent after falling to as low as 5.9 percent in the middle of August.

The dollar is also very strong, with the dollar index rising by as much as 4.9 percent in less than a month. This in turn caused the peso to go above the 57 level.

Finally, during his speech in the Jackson Hole Symposium, US Fed chair Jerome Powell implied that the Fed isn’t done yet with its aggressive tightening policy. Consequently, the market is now expecting the Fed to raise rates by another 75 basis points in its September meeting.

Despite the gloomy situation, there are reasons why we should remain optimistic and buy the dip.

The most important reason is that inflation will likely peak soon. Signs of peaking inflation were among the main catalysts for the market’s strong performance in early August. Although the increase in commodity prices last month cast some doubts on the sustainability of the downtrend, commodity prices are once again going down with prices of some commodities falling below their July lows. For example, after hitting a high of $97 per barrel last month, oil is now trading below $87 per barrel.

Most global central banks, including the Bangko Sentral ng Pilipinas, also continue to raise interest rates. Consequently, the argument that weaker global economic growth outlook will lead to lower inflation still holds.

Foreign investors are also slowly returning to Southeast Asian markets. For example, Philippine stocks enjoyed net foreign buying worth P1.4 billion for September so far. This is after suffering from consistent net foreign selling since March.

According to a Bloomberg news story titled “Traders find haven from global stock gloom in Southeast Asia,” foreign investors’ bullishness on Southeast Asia is due to the reopening of its economies, leading to booming domestic demand and the return of tourists. These are helping shield Southeast Asian economies from global economic headwinds.

The article also attributed investors’ positive view on Southeast Asian markets to the low weighting of tech stocks, which are currently out of favor, and the large weighting of banks which are beneficiaries of rising rates.

The favorable impact of the reopening of the economy was evident in the Philippines’ first half GDP (gross domestic product) growth, which reached an average of 7.8 percent despite rising inflation. Consumer companies led by restaurants and retailers also delivered surprisingly stronger than expected first half earnings results as the favorable impact of strong consumer demand more than offset the negative impact of higher costs.

Philippine banks also delivered very strong first half earnings results. Aside from enjoying higher demand for loans, banks posted higher net interest margins, as they benefited from rising interest rates.

Finally, valuations remain attractive. Almost all stocks continue to trade below their historical average valuation multiples (P/E ratio, P/BV ratio). Although earnings face downside risk due to the numerous challenges facing the economy, these are largely priced in given stocks’ depressed valuations.

Admittedly, the Philippine stock market has never decoupled from the US market, and the strong possibility that the US market is only in a bear market rally could prevent local stocks from entering a bull market. However, neither should Philippine stocks go down steeply given our economy’s stronger fundamentals and local stocks’ cheaper valuations.

As such, investors with a longer investment time horizon should take advantage of sell-offs such as these and buy the dip.