Philippine Stock Exchange 2013: Thinking long term

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Category: Opinion

Published on Wednesday, 19 December 2012 18:43

Written by John Mangun / Outside the Box

BACK in the “dark days” of January 2012, the Philippine stock market composite index was trading at about 4,600. Every afternoon, stock-market participants were glued to the television, watching the Corona impeachment trial unfold.

Economic forecasts for 2012 were mixed at best and there was uncertainty about the effect of the intense politics at the time. In 2011 stock-market performance was muted and looked favorable for 2012, but not stupendous.

At that time, there were a few stock-market followers that believed that 2012 could be a banner year. My forecast at the time was that the index would reach between 5,600 and 5,800 before year-end. Those with a long-term view had similar predictions but we were in the minority. The Philippine Stock Exchange (PSE) lived up to our expectations.

Now we are near historic highs, the only question on investors’ minds is: What about 2013?

The Bangko Sentral ng Pilipinas (BSP) gave a nice Christmas bonus by artificially depressing the value of the Philippine peso in the last month by spending tens, if not hundreds, of million of pesos intervening in the foreign-exchange market. Now this did help those who received inward remittances from overseas workers and balikbayan relatives with perhaps a few hundred extra pesos when they converted their dollars. But the huge bonuses went to the banks and moneychangers like SM, with at least P300 million extra profits because of a 25-centavo reduction in the value of the peso during December.

While the BSP has been depreciating the peso against a basket of global currencies, the US dollar depreciated by 2.1 percent in the last month and a half. The peso has appreciated about 0.05 percent since late October.

After the New Year, it is likely that the BSP will allow the peso to return to its fair market price. We will see the peso return to the mid-40s on its way to 38/39. This will boost PSE stock prices higher. Look at the BusinessMirror chart of the peso and the PSE and you will see the strong correlation between peso and PSE movement.

By attempting to control the “price” of the peso, the BSP created an artificial demand that will cause the peso to rise in January. The BSP is hoping that after the holidays, peso demand will lessen, but that is an outlier bet. The PSE will react positively.

The government’s failure with its Public-Private Partnership Program has long been factored into both the economic growth of the nation and the PSE. Actually, the failure is a blessing in disguise. The third-quarter growth numbers show that the economy has enough (albeit small) sustainable momentum that even the slightest improvement in government spending on PPP will be favorable for growth and therefore for the PSE.

While still a contentious issue, the administration is going to have to move forward with its mining policy. This cannot be ignored forever, regardless of the desire of many politicians that it would just die and disappear. A resolution of this issue will either come with the government getting proactive or it will be forced through legal action. Either way, closure after two years of inaction will be a driver for stock prices.

The 2013 elections will pump additional funds into the economy, the results of which will show up in higher stock prices. But perhaps more important is the possibility that there will be some reshaping of the political landscape that may signal changes to the currently stagnant economic policy.

Last, the US Federal Reserve’s decision to increase it Quantitative Easing program by an additional $45 billion per month will create more money being available for investing in emerging stock markets such as the Philippines.

So what level will the PSE target for 2013? It is too early to make that specific prediction. However, if the PSE composite index continues to hold around the 5,700 or higher for the next month, a technical analysis projection would put the index at 6,900 within 14 months.

Let’s leave it at that pleasant thought through the rest of the holidays.

E-mail to mangun@gmail.com, web site is www.mangunonmarkets.com, and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.