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The last
six weeks have been an exciting time in the global and
domestic financial markets. We have seen a reversal of a
yearlong uptrend in commodity prices and a reversal of
the downtrend of Philippine Stock Exchange (PSE) prices.
In the
words of my good friend James Bnd. Garcia, “I previously
related this information.”
On July
1, my analysis revealed that there would be a turnaround
and substantial drop in crude-oil and other commodity
prices. The July 10 prediction was that “Oil prices will
plunge.” Oil closed at $147 that day. On July 22, it
became clear that local stock prices would begin at
least a short-term rally. The PSE index was at 2,409.
Now, a
month later, oil is below $120 a barrel, global
commodity indexes have lost over 60 percent of the last
12 months’ price gains and the PSE is up over 300 points
or nearly 15 percent.
However,
all that is literally yesterday’s newspaper. Now there
is only one important question: Where do prices go from
here?
In June,
investment firm Goldman Sachs was predicting $150 or
higher oil. Decreasing supply and increasing demand was
the justification for that analysis. Last week,
financial institution Lehman Bros. was saying that oil
has “peaked for the next few years.” The most the
die-hard oil bulls can now muster little more than to
say, “Prices are down now, but just wait; $150 WILL come
eventually.”
Much
before the end of the year, oil will trade in a range
between $60 to $80 a barrel. Now that oil prices have
turned down, the best that the “gloom- and-doomers”
could offer is that lower oil prices are terrible
because it shows how weak the Western economies are
doing. More nonsense.
Consumption has not fallen because of global weak
economies; global weakness has been caused in large
measure by high oil prices. As prices fall, these
economies will strengthen. But consumption will not
return to former levels. Peak consumption, particularly
in the West, occurred several years ago. And regardless
of how “mighty” China may appear, its consumption is
still far behind the US and Europe.
As
mentioned before, the drop in US daily consumption over
the last few months is greater than total world
increases in oil use from 2005.
Oil at
$147 has been a wake-up call for all nations regardless
of economic class. Countries like China and India have
realized the foolish fiscal policy of high fuel-price
subsidies. Nations like the US have realized the need
for alternative-energy sources, such as shale oil and
coal liquefaction. Manila residents have realized that
riding the Metro Rail is not so bad after all. These
factors will continue and oil will drop just far enough
to keep a little pain and wise energy use continuing.
A month
ago, we were looking at a potential disaster on the PSE.
My greatest fear was that certain yearly indicators
would give a sell signal forecasting a fall to 1,000
over several years. That scenario has been avoided.
What we
now have is a correction in a multiyear bull market that
began at the end of 2001. It is very likely that over
the next 12 months the PSE will rise to 4,000 and more.
In the short term, we will run into a strong pause at
2,900 but this will be temporary. But do not give a
thought to the PSE index; it is individual stocks that
will raise your wealth.
Companies like the Philippine Long Distance Telephone
Co., Ayala Corp., Megaworld, Filinvest and the rest of
the blue-chip stocks will experience great investment
returns. Although the index may only rise by 40 percent,
individual big-cap issues will double, triple and
quadruple in price.
And if
these big stocks will increase in price like this, it
will also be true for the second- and third-line issues.
We will see a return to the days of the “rocket chip”
shares of a decade ago, but with one significant
difference: This time, the gains in stock price will be
justified by the financial fundamentals of the company,
thereby sustaining share-price increases.
The
investing public and the listed companies alike are not
going to tolerate the excesses of stock trading and
unjustified stock-price movement that has happened in
the past. Even this year, we have seen share prices
negatively react after large upward movements when
corporate financials did not warrant increasing stock
prices.
Because
of this new investment common sense and caution, shares
prices may take more time to react to good news.
However, the advantage is that when there are good
corporate developments, prices will more accurately
reflect the long-term benefits of the good news. We will
see less discounting of both good and bad information.
The “losers”’ will be shot on sight; the “winners” will
get the gold.
Inflation and consumer prices will drop rapidly over the
next few months and the peso will appreciate more, but
probably not beyond the 42.50 to 42.80 area. There will
not be an increase in interest rates unless the Bangko
Sentral is way behind the curve.
The
first half of 2008 has been very difficult, but the
beginning of the third quarter marked a remarkable
change in direction. Now is the time to get onboard and
take advantage of the positive investment that is
unfolding.
E-mail comments to mangun@email.com. |
