MANILA – (UPDATED 5:18 p.m.) For only the second time in his eight years at the helm of the Bangko Sentral ng Pilipinas, Governor Amando M. Tetangco Jr. came out to calm the financial markets on Thursday, as the peso slumped and the Philippine Stock Exchange posted its single largest decline since the global financial crisis of 2008.
In a statement released ahead of today’s Monetary Board meeting, Tetangco said the drop in the local equities and foreign exchange markets are just part of the “reasssessment” of global risk by investors.
“Inflation expectations continue to be well anchored. Underlying fundamentals remain sound. Therefore, we continue to be watchful of market conduct, including price movements in the [forex] market to ensure these are not excessive and that these remain consistent with overall price and financial stability objective,” he said.
Tetangco’s statement comes amid the peso’s continued to slump against the US dollar, and the benchmark stock index’s biggest one-day drop since the collapse of investment banking giant Lehman Brothers in 2008.
Tetangco back then was in the middle of a six-year term in 2008, when he joined other central bankers in assuaging investors. Despite their assurances, the global economy entered a two-year recession, its worst since the Great Depression of the 1930s.
Market analysts however said it’s not yet time to panic.
“The market is not crashing. It is normalizing,” said Jose Vistan of AB Capital Securities Inc.
In less than a month, stocks saw a major reversal of momentum due to foreign selling, as fund managers rebalanced their portfolio on expectations that the US Federal Reserve would taper off its aggressive stimulus measures.
The PSEi is now trading at 6,114.08 at the close of Thursday’s session for a year-to-date return of 5.18 percent. The local barometer’s gains peaked at 27.17 percent when it hit a record high of 7,392.20 on May 15.
Market “on steroids”
“The market went up to record levels because it was on steroids in the form of liquidity. If the central banks are going to wind down the stimulus activity, you’ll effectively reduce steroids pumped into the system,” said Vistan.
The recent correction should be viewed as an opportunity to buy stocks on the cheap as strong macroeconomic fundamentals remain intact, he said.
“Nothing has changed fundamentally. We know where investors are attributing the selloff: concerns that the Fed will scale back its bond buying. It’s externally driven in that respect so what we’re seeing today is an opportunity to buy,” said April Lee-Tan, head of research at COL Financial Group Inc.
She said the selloff has made stocks cheap “across the board.”
“It’s not confined domestically. We remain hostage to foreign selling because of developments overseas. The selloff is a concern but the real concern is where is the bottom? I think it’s not too far anymore,” said Astro del Castillo, managing director at First Grade Finance Inc.
“The market is correcting not because fundamentals have become bearish but because the market is normalizing. When normalizing, the average PE of the market will be around 14.6 market. The last time I checked it was at 16 times so there’s a little more room on the downside,” Vistan said.
“Bull cycle still intact”
While the selloff was taking place, the government reported that the Philippine economy expanded 7.8 percent in the first quarter, the fastest in Asia, even as inflation last month settled below the low-end of the full-year target range at 2.8 percent.
“In truth, the market did not have much time to digest [these data],” said Jun Calaycay of Accord Capital Securities Inc, adding that the increased negative volatility in prices amid a relatively unchanged economic outlook has created fundamental pricing anomalies.
“Five years ago, as advanced global economies loosened money policies by pulling interest rates lower to near zero and injected liquidity in the financial markets to stem any movements to the contrary, funds sought better yields which in turn was presented by emerging markets. Ceteris paribus, it is quite rational for the flows to reverse as monies take advantage of emerging signs pointing to the stirrings of a recovery in advanced economies — a correction of the pricing anomalies,” said Calaycay.
“But whether this tack of foreign funds will put the brakes on the five-year old bull is still debatable. The returns offered by both our fixed-income and equity instruments remain competitive. The rate differentials still work to our favor and so do listed company prospects despite a not-too-stellar first quarter earnings record,” he added.
Tan advised investors to adopt a “buy slowly” strategy in light of the steepness of the correction.
“We have to respect the level of the decline which is quite steep. When that happens, you don’t expect the market to rebound overnight because confidence has been hurt,” Tan said.
“Before we end the bull cycle, we’ll see higher highs. It’s still difficult to say if we’ll return this year to record levels, but we think the bull cycle is still intact,” she added. –Likha Cuevas-Miel and Krista Angela M. Montealegre, InterAksyon.com
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