We should do a survey—conducted by a real polling company and not one which name starts with “D”—as to why the Philippine Stock Exchange (PSE) has been in a downtrend for 13 months. The reason is that a mass public-opinion poll would offer as good an explanation as that from the experts.
If you try to correlate the growth of the Philippine economy and the trend of the stock market, you would probably be disappointed. The PSE index (PSEi) peaked in April 2015. Yet, the quarterly annual GDP growth in 2015 was 5 percent, 5.8 percent, 6.1 percent and 6.3 percent from the previous year. There does not seem to be a correlation of the GDP growth with the PSEi.
Perhaps, we could look at the movement of the Philippine peso against the US dollar and find a similar trend with the PSEi. But here also we might make a case for a similar directional movement—Philippine peso down 4.4 percent; PSEi down about 12 percent at the low—but strong enough for a correlation. The statisticians might disagree if we measured the “beta”—a term that measures correlation of movement—between the two. You can see both
moved lower.
However, you would have a difficult time trying to trade either the Philippine peso or the PSEi against the other. The “correlation” really works only in perfect hindsight.
You can make a general case that, over the last 10 years, good Philippine government fiscal management—low debt-to-GDP ratio and low government budget deficit-to- GDP—correlated with a rising stock market. But here again, that does not account for a downtrend over the past 12 months.
Historically, the inflation rate has moved the stock markets higher, as investors often look for higher returns to combat the effects of inflation. But the same can be true for times of low inflation, which we have had in the past year.
Even using “value-investing” methods—the most used being the Price-Earnings Ratio (PER)—are not going to work. The “value investors” will never do this but if you put a chart of the PSEi on top of a chart of the PER of the PSEi, you find they have moved together since 2008. In other words, a “high” PER meant a higher PSEi number. The lowest PER came at the same time as the lowest PSEi—October 2008. How confusing it that?
So how can we possibly answer the question for the PSEi: How far and how soon? Let’s go back to our opinion poll. In the US—but never publicly in the Philippines—they ask, “No matter who you are going to vote for, who do you think will win?”
Back in October 2015, 75 percent said Donald Trump would win the Republican nomination, even as only 23 percent said they would vote for him.
Back in April 2015, sentiment for the PSEi was 72 percent to the upside. Currently, it is 54 for an upward move. The PSEi will go much higher, and sooner than you expect.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.