Stock market facing more corrective pressures

The local stock market has been performing very well since the start of July, with the Philippine Stock Exchange Index rising by around 15 percent.

The strong performance was driven by expectations the US Federal Reserve (Fed) would finally begin cutting rates after a hiking cycle that has been going on for more than two years. The market also benefited from the Bangko Sentral ng Pilipinas’ surprise announcement that it would cut banks’ reserve requirement ratio by 250 basis points (bps) this October.

The developments led to the steep decline of the Philippine 10-year bond rate and the sharp appreciation of the peso, which had a favorable impact on the stock market.

In late September, the Chinese government released several monetary and fiscal measures with the goal of boosting economic growth, halting the property rout, shoring up the stock market and stabilizing employment as quickly as possible. These fueled a significant rally in Chinese stocks, which also benefited other Asian markets including the Philippines.

However, the local stock market is now facing pressures to correct.

The US 10-year bond rate already bottomed and is now 48 bps higher at 4.10 percent. Bond rates increased as the market tempered its expectations on the size of Fed rate cuts for the rest of the year. This was after the US Bureau of Labor Statistics (BLS) disclosed that September nonfarm payrolls jumped to 254,000, which was much higher than the consensus forecast of 150,000.

Last week, the BLS announced that the September inflation rate in the US reached 2.4 percent, which was higher than the consensus forecast of 2.3 percent. This is another factor that could keep interest rates elevated.

On the positive side, the Philippine 10-year bond rate remains low, increasing by only 9 bps from its Oct. 1 low of 5.64 percent despite rising US bond rates. However, the pressure to go up is still there if US bond rates continue to rise.

The dollar is also strengthening, with the dollar index now trading at 102.98, or 2.5 percent higher than its Sept. 27 low. Because of this, the peso is depreciating and is currently weaker by 2.7 percent from its September low of P55.685 against the greenback.

A weak peso is not good for the stock market, as heightened risk of foreign exchange losses could cause foreign investors to turn into net sellers. Note that consistent net foreign buying was largely responsible for the strong performance of the stock market during the past three and a half months.

Foreign investors have already turned into net sellers the last three trading sessions, snapping 27 consecutive trading sessions of net buying. Although three days do not make a trend, it is still worth paying attention to.

Finally, there is still a lot of skepticism toward the Chinese government’s ability to turn around its economy.

For example, after rising by as much as 29 percent since the middle of September, the Shanghai Composite Index fell by as much as 6.6 percent the past few days due to concerns regarding the effectivity of their government’s monetary and fiscal stimulus measures.

The market is expecting China to announce new stimulus amounting to 2 trillion yuan or $283 billion. However, some economists believe that is not enough, given the magnitude of the Chinese economy’s problems.

Only time will tell if the government will succeed in convincing investors that its measures are enough to turn around the economy.

Given the increasing pressure for the local stock market to correct, investors should continue to manage risks by keeping some cash and rotating to stocks that are trading at cheaper valuations. Wait for prices to go down to attractive levels before buying back stocks.