Philippine market: Higher, higher and higher?

While thin slicing market transactions the other week, I said that the market looks set to even go up higher despite some signs suggestive of the ides of March phenomenon—a seasonal event considered in the local stock market as fraught with danger—thus, have more often than not caused the market to reverse trend as local investors choose to sell and stay out of the market when it comes by.

Incredibly, the market shrugged off the negative meaning of the event and went up even higher in a very strong way by Friday last week. As a consequence, the benchmark Philippine Stock Exchange index, or PSEi, broke past its previous record high of 5,050.99 established on March 14 as it closed last Friday at 5,145.89, up 94.9 points, or up 1.89 percent. Also, the market chalked up a daily trading gain last Friday of more than 100 points from the previous day—a market advance long erased from public memory since the bull market of 2007.

Last Friday, too, the market was able to churn out a value turnover equivalent to P10.58 billion, which was certainly exceptional. It was almost double the value turnover that the market had been normally churning out on a daily basis as far back then in 2007. If I may add, these observations are indications that the local market is possibly fast becoming truly bullish.

Search for answers

The big question that was begging for answer over the weekend, as a result, was if the market will continue to go higher. By Tuesday, part of that question may have found some answers. The result of trading on Monday could be one enlightening experience.

To my mind, though, the true answer can be found by looking back at past market data and news. It would lead you to the very explanation of the more essential aspect of the question, which is on the issue “if the market has the very fundamental strength to go up higher.”

I could not think of a more appropriate explanation to this thesis than the old Asian proverb which, more or less, says that “the future is but a logical continuation of the past.” Here, what the proverb is simply trying to convey is that, the future is the consequence of decisions and actions taken in the past. This will also explain why most successful investors say that “making money in stock trading does not mean knowing the secrets of forecasting future prices!” (To reiterate, this is the main theme and principle promoted by this column).

Bottom-line spin

According to market statistics, last week’s market runup was led by local investors’ demand as they fanned across the board for interesting stock plays, while foreign investors continued to pour more money on first-line or blue-chip stocks.

On one hand, this is encouraging because the level of foreign investors’ money continues to be substantial and remains to be in the nature of net buying. On the other hand, it’s also discouraging because local money has always been more short term than anything else. As such, they trigger a sell-off not too long after the market hits a high.

Owing to these observations, the market may be forced to fall because of the nature of local money where they have been observed to be more short term than long term. Actually, there are stocks that have really gone up, too, already—not only technically as in overbought (already priced high by the market)—but compared to their estimated fundamental values. For instance, the market price of Universal Robina Corp. (URC) has climbed as much as 87 percent in the past 12 months. Globe Telecom Inc. (GLO) has as well advanced by as much as 73 percent.

But based on reported estimated earnings for the year by these listed companies, the gap between their market prices and intrinsic or fundamental values may soon become smaller and become actually closer to each other. This may happen as the economy picks up in the second quarter based on promised policy changes along with the rollout of planned projects by the government, which these listed companies have included in their operational plans.

In turn, these developments will be galvanized by the impact of external factors especially by the improving state of the biggest economy in the world, the United States, along with the more decisive actions being taken by leaders in Europe, that again has put at risk US assets deployed in that part of the globe.

As you may have witnessed in the past 18 months or so, our market has been also significantly moved by developments—most especially—on Wall Street and markets in Europe. Favorable leads positively impact on our market while negative leads elicit unfavorable results.

In addition, even if there are aberrations in the action of our local market like when on some days it veers away from the trend of Wall Street, it always ultimately converges or conforms with the general direction of Wall Street. For a strategy in the present situation, therefore, it is best to stick with “value stocks” or with so-called companies with “great business.”

An example of the latter is about companies whose line of business could be simple but are competitive and profitable. The former is about buying “stocks that are trading for less than they are worth,” and if I may add, “or potentially worth” in view of unfolding developments (we have several more at the moment despite the impact of recent market rallies).

(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at [email protected] or [email protected]. Visit www.kapitaltek.com.)