The year 2018 has been a turbulent one for the Philippine stock index so far. Not only have we officially entered bear market territory (20% decline from the top), we are also the worst performing market in Asia with the worst performing currency in the region as the peso declines 7% YTD against the US dollar. The word "worst" seems to be appearing more frequently, and may cause much alarm especially when we look at how strong 2017 was for the Philippines coupled with our historical highs in January 2018. Given all these, we have to remember that the market is always forward looking; predicting market behavior-6 months in advance. Volatility comes when markets adjust its forward assumptions on the economy. Consensus confirms that we are in the midst of such adjustment.
The reason for the massive losses are three-fold, rising interest rates in the US, inflationary pressures in the local economy, and the ongoing trade disputes between the US and its trading partners. Interest rate changes are one of those factors that greatly influence the market. The US has raised rates twice and is forecasting two more for the year. The Philippines, on the other hand, has raised rates twice. Once the market also accepts that, then we can see stability come in. The third factor is the ongoing trade disputes between the US and its trading partners, most notably China, Canada, EU and even India, which drag global risk sentiments. We are watching this space as the threat of a trade war is escalating though market consensus say that the likelihood of that happening is low.
So the big question is “Are we at the bottom?”
Analysts suggest no. While we may decline further, the silver lining is that we may be near the bottom. Case in point, the aggressive foreign sellers have reduced their exposure to Philippines stocks to 27%, which is already lower than their 5-year average exposure. The Bangko Sentral ng Pilipinas (BSP) has changed its tone from downplaying the threat of inflation to now monitoring it closely. Inflation is expected to taper off in the third quarter of 2018, as the adjustments in prices due to Tax Reform for Acceleration and Inclusion (TRAIN) law and higher oil prices should wane off.
The 7000-7100 level of the PSEi should provide strong support to the market, but hitting this level does not mean a quick reversal. The index can still move below that range and consolidate for a few months before moving up. However, that same range is the level that could potentially reverse the bad sentiment in the market