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Tuesday, August 25, 2015

COL Market Update: Philippine market hit by contagion

Philippine Market hit by contagion
  • The PSEi is currently suffering from a major correction, triggered by the People's Bank of China's (PBoC) move earlier this month which led to the devaluation of the yuan.
  • As discussed previously, the Philippines is not expected to be a major loser of the devaluation of the yuan as the country is not very dependent on exports. We also enjoy a strong current account surplus, thanks to our resilient OFW remittances and our strong BPO sector. Nevertheless, the strength of the local economy doesn't spare us from contagion risk. Note that for the month of August, the stock markets of our closest peers Thailand and Indonesia are down by 8.8% and 13.1% respectively as their economies are expected to be hurt by the yuan devaluation. This in turn negatively affected sentiment for the Philippine stock market.
    • Although the Philippine market's ongoing sell-off is due to external factors, we as investors should make decisions based on what we see rather than what we think. Objectively speaking, the PSEi's technical picture has deteriorated significantly. Today, the PSEi broke its six and a half year uptrend line and two important support levels namely 7,272 and 6,950. The PSEi is also currently 17% off its April high of 8,136.
Some tips on coping with sharp market drops include the following:
1. Raise cash, don't use margin 
Rallies that take place in the short term should be viewed as opportunities to raise cash. This should help us avoid the risk of being forced to sell at the low or not having any cash to buy when stocks are already cheap. While selling right now can be emotionally painful in the short term, reducing exposure in the stock market during difficult times helps us mentally prepare to buy bargains as markets gradually bottom. 
2. Prefer peso cost averaging over lump sum investing 

When markets drop, it creates opportunities to buy bargains. This is especially true for markets such as ours which do not deserve to be sold-off based on fundamentals.  While we think 6,500 would be a good level to buy this market, there is no guarantee that the PSEi will bottom at the said level. Consequently, it would be more ideal to adopt a peso cost averaging strategy over the next six months instead of timing the perfect entry point when buying this market. 

One of the opportunities that will be created by the ongoing market sell-off is the opportunity to buy quality stocks that normally trade at expensive valuations when the market is not correcting. While there is nothing wrong with any of our existing stock picks, we might remove some to make way for other quality names that professional fund managers normally focus on because of size and liquidity. This is because we expect the said blue chip stocks to go up first when the PSEi recovers. Stay tuned as we make further announcements in the next few days or weeks regarding the market and our stock picks given the numerous changes happening globally.     

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