Changes

I was right about what I thought the market would be last week: Our market has been largely driven by the dynamics of prices and not on the basis of underlying fundamentals. It was ready to change directions, but beyond the 5,000 level of the Philippine Stock Exchange index or PSEi remains to be overbought (overpriced) territory.

It was not a surprise, therefore, that the market responded on mere “fresh hopes” like the way Wall Street and the other equity markets of the world reacted to positive but “still-to-be-felt” leads that unfolded last week. This time, these “fresh hopes” came from the reported plans by global central banks “for coordinated intervention to support the economy.”

In particular, “on Thursday, China’s central bank announced a surprise interest rate cut” to further encourage productivity. This was actually preceded by “the decision of the European Central Bank (ECB) to hold rates steady at its meeting on Wednesday” along with the report that “Federal Reserve Chair Ben Bernanke told lawmakers that the US central bank (also) stands ready to act” to reinforce economic developments in the world’s biggest economy.

Thus, while Bernanke “offered no hint that additional stimulus measures are imminent,” Wall Street’s major indices “all posted (their) largest weekly gain of 2012” last week. The Dow Jones industrial average rose 93 points, or 0.7 percent, to end at 12,554.  The S&P 500 gained 11 points, or 0.8 percent, at 1,326. The Nasdaq was up 27 points, or 1 percent, at 2,858.

Nonetheless, in order for the market to push on higher, it must be accompanied by further fundamentals that will support fundamental changes in the market. One of the changes that may happen and support the market is the report that the new policy for the mining industry may, at last, be signed by P-Noy this week.

Based on early comments, the new policy will maintain the two major provisions that raised industry concerns. As described, it “would be firm in enforcing stricter environmental protection and that the government gets its optimal revenue share.”

According to Secretary Ramon Jesus P. Paje of the Department of Environment and Natural Resources, this will mean that mining firms will have to first “undertake thorough environmental studies for prospective operations.”

Under the current but suspended policy, the terms of operations of local companies are regulated by the provisions of the mineral production sharing agreement or MPSA while the terms of operation of foreign firms are regulated by the financial or technical assistance agreement or FTAA.

Should the new policy be strictly enforced, there may no longer be a distinction in the capital base of local and foreign mining firms in order to operate and, at the same time, it may no longer be practical to operate on a small scale. The added cost to protect the environment and at the same time provide for a bigger revenue share for the government will just require higher capitalization.

The downside of this tack by the government may politically backfire as antismall miners—something that may test the firm resolve of the present leadership to instill an efficient and truly productive mining policy. This may further be exacerbated by the proposal that previously awarded mining permits on agricultural lands or ecotourism areas be revoked.

The good news, though, is that existing mining operations may no longer be subjected retroactively in the new revenue-sharing policy as otherwise feared by industry participants.

More changes

In line with the effort by the bourse to capture and reflect the true state of the market and align local classifications with international standards in order to better guide market participants, particularly global investors, in assessing companies in our market, additional categories under the existing indices will be introduced starting July 2.

“Diversified Industrials” under the industrial sector will be replaced by “Electrical Components & Equipment” and “Other Industrials.”

“Casinos and Gaming”, together with “Retail” and “Other Services”, will take the place of “Diversified Services” under services, too.

Covered under the “Electrical Components & Equipment” subsector will be firms that produce wires and other electricity-related equipment while “Casinos and Gaming” will include gaming facility owners/operators and lottery/betting service companies. The “Retail” category will include owners/operators of consumer stores as well as distributors and wholesalers.

Those companies with unique classifications are to be placed under “Other Industrials” and “Other Services.”  These two subsectors were introduced in 2005 as a general category to “catch” all listed firms that do not belong to any other grouping in the industrial and services sectors.

The subsectors under the financials, property, mining and oil, and holding firm categories will be unchanged.

With the above new changes, this will leave 11 companies in the diversified industrials subsector and 12 in the diversified services subsector.

Bottom line spin

There is no doubt that the market continues to be technically driven as it easily succumbs to profit taking. From its current state, though, it’s more likely to advance than breakdown. The climb and breakout from the 5,000 level can only come from fundamental developments that will follow in the coming days.

Being able to sustain the surprisingly strong 6.4-percent growth rate of the economy in the first quarter is a critical factor that will translate to greater revenue and profit growth to businesses.

Accordingly, this will be a big challenge “given the current global uncertainties.” The Philippines, however, is said to have some room to support its growth momentum through “higher social and infrastructure spending” sourced from fiscal revenue.

Hopefully, we may find indicative answers in the June 15 meeting of the Development Budget Coordination Committee (DBCC), the interagency unit tasked to set the macroeconomic targets of the country.

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