Gus Cosio says so

Ideas on the Philippine Stock Market

Our friend Jet

9:20am Thursday 5 November 2009  Philippine Stock Exchange Index  2907.64 (not yet open)

Yesterday, one of our readers – Jet –  expressed concern about Prof. Roubini’s warning that the unwinding of carry trades as the US dollar appreciates will be most felt in the equities markets of emerging economies.  Jet was anxious on how this will play out for the Philippine market.

I wrote Jet my that most of carry trades that come to our shores normally go to the bond market because these trades are put on in lots of US$5million or more.  It is easier achieved in FXTNs and the positive carry is easily measurable in fixed income. In fact, this October, we saw unwinding of carry trades done in early September. Notice how the Php moved from above 48 to 46 between late August and early in September and FXTN yields had moved lower.  In mid-October, the trades slowly unwound. That was why the Php moved way above 47, up to 47.80 in fact two days ago,  again and bond yields edged higher.
Doing carry trades on Philippine stocks is very much possible but timing has to be very good.  I think that in this cycle though, our market has been dominated by locals.   Timing the market will be more of a local call rather than any foreign hedge fund.  I have been very cautious these past few weeks waiting for prices to come my way rather than chase it.  My underlying view of the market remains constructive but I do not discount that there may be sell-offs from time to time.  Investor demand for local stocks can be sustained because of low dollar and peso interest rates.  Last night in New York, the U.S. Fed reaffirmed their policy of keeping interest rates low make it possible even for even our local arbitrageurs to do their own methods of the carry trade.

Given that the over-all market volatility has been relatively low, even if we include the weight of MER and FPH, this tells me that local and even foreign investors are being very deliberate in their Philippine equity portfolio tactics.  I venture to say that most portfolios do not want to be underweight in this market today.  Given my outlook on interest rates in general, I would not want to be underweight either.

Incidentally, MPI traded as low as 3.00 yesterday which to my mind is a good buy level for the stock.  AGI also traded as low as 4.00 which is again pretty cheap for this stock.  The big seller of AC yesterday was having a hard time getting all his volume out, but for those who love this stock, 287.50 is not such a bad level to own this stock.  I noticed also that ALI was well supported at 10.50.  All told, a lot of the stocks are trading well below their recent highs.  Even TEL and GLO are in the lower region of their recent trading ranges.  My thoughts are that the risk level in the market today is not as high as our friend Jet thinks it to be.

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November 5, 2009 - Posted by | Financial markets in Asia

13 Comments »

  1. Hi Sir Gus, Hi readers!

    Any news on the result of FPH board meeting? =)

    Thanks!

    P.D. No MER, No FPH

    Comment by Oliver Mia | November 5, 2009 | Reply

    • What I learned was that a transaction was a loan by Pangilinan’s group to FPH with Meralco shares as collateral plus an option to buy the shares at 300.

      Comment by Gus Cosio | November 6, 2009 | Reply

  2. hi Sir Gus

    Any thoughts on what will happen on MPI and MER? thanks!

    Comment by JP | November 5, 2009 | Reply

    • I think MER will stabilize around 180 to 200 as people will want to avoid selling their MER and keep them in case a tender offer is made at 300. As for MPI, it is really business as usual because their original business plan was to accumulate infrastructure businesses. Now they have a water utility and a power utility. Analyst will try to extract whatever values they can find in the holdings of MPI. I think MPI will continue to be a trading stock for Philippine infrastructure play. The information that I’d like to volunteer is FPH which is the biggest beneficiary of this exercise. Our estimate is that FPH NAV really goes over the top with MER at 300. Even with MER at 200, FPH should be worth at least 20% more than where it is now.

      Comment by Gus Cosio | November 6, 2009 | Reply

  3. Hi, FPH sells to MPI @ 300.

    Comment by jovy | November 5, 2009 | Reply

    • They were willing to acquire MER at any cost. It must be very valuable to their over-all strategy.

      Comment by Gus Cosio | November 6, 2009 | Reply

  4. MPI will issue Php 12B woroth of bonds.

    Comment by Oliver Mia | November 6, 2009 | Reply

    • MPI will have little problem raising the money.

      Comment by Gus Cosio | November 6, 2009 | Reply

  5. ISM is doing really well. Would you happen to know why?

    Comment by Nicole | November 6, 2009 | Reply

    • It’s because WEB is moving up again. WEB went up to 18 and people think that ISM will have a similar move.

      Comment by Gus Cosio | November 6, 2009 | Reply

  6. Sir Gus,

    How can anyone from here, take advantage of the low interest rates offered in the US? How to carry trade it like loaning from the US then buying government securities or in other country?

    Thank you for your sound advices. More Power!

    Comment by Teodolo Aclao | November 8, 2009 | Reply

  7. Unfortunately, these low rates are available only to the big players who have nurtured their relationships with their banks. Little guys such as you and I have to get by on retail lending rates that the banks charge. In the U.S., if you have positive homeowners’ equity, you can take out a second mortgage for cash at around 5% and use that money for carry trade, but yuou have to be very disciplined in your trading strategies.

    Comment by Gus Cosio | November 9, 2009 | Reply

    • The carry trade can be played indirectly by selling/converting some of your US dollar holdings and buying Asian currencies like HK dollar, Korean won, Chinese yuan etc or currencies of countries that will benefit from the commodities boom, which is premised on the growth of Asia. These currencies are Australian dollar and Canadian dollar. At around May I started converting some of my cash into Aussie dollar at around 36.50 and opened a TD account. Recently I bought more Aussie dollar at 42.

      Comment by Melvin | November 9, 2009 | Reply


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