10:10 am Friday 19 February 2010 Philippine Stock Exchange Index 2983.04 (mid session trading)
Wall Street and the rest of the developed markets were up overnight. Three minutes after the markets had closed, the Federal Reserve Bank took away the punch bowl by raising the discount rate to 0.75%. The market was expecting the hike, but not until the FED would have met on March. The fact that the FED chose to act earlier appears to be a signal that there is urgency in the move. The significance of this move is the end of the decline in policy rates and possibly the beginnings of an upward trend in interest rates.
Initial reactions to the hike were: 1. The S&P 500 Financial Select Sector SPDR fund, an exchange- traded fund that tracks financial stocks fell 0.9% in after-hours trade, erasing its gain from the regular session. Shares of Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. each retreated more than 1 percent. 2. The MSCI Asia Pacific Index lost 0.5 percent as of 9:43 a.m. in Tokyo, and futures on the Standard & Poor’s 500 Index expiring in March lost 0.8 percent.
I would say these are knee jerk reactions because businesses start to get worried that cost of borrowing would rise. In two year U.S. treasuries, the yield went up by 2.5 basis points to 0.952. I would say absolute levels of borrowings are still pretty low and the U.S. dollar yield curve had been very steep over the last year and a half that what would really matter is not nominal interest rates but the spread that companies pay for long-term borrowings. That does not look to be drastically threatened by the FED’s move. If at all, I think it signals investors that monetary authorities will not relent on their responsibility in mitigating any inflation down the road.
The local market opened 13 points lower, roughly 0.4% down. As of this writing, the index declined another 5 points so we are now down around 0.6%. The question that will start to bug people is that whether this will be the start of a reversal of the up-trend that we had seen to have started in march 2009. While it is too soon to really tell, I tend to think that the trend is not yet over. What we may see now is a deeper correction, but if the global economy is improving, earnings is bound to follow. Why then should stock prices decline precipitously. I think that it is even good that the U.S. has raised its rates because it should make the U.S. currency stronger which is positive for the Philippine economy. Remember, our GDP consists 40% exports and OFW remittances fuels 70% of consumption spending.
I think the fundamentals for local equities remain intact. I think the local banks are not as vulnerable to this move as their counterparts in the U.S. as bank liquid assets have been persistently high. If at all, they will probably see wider net interest margins in their FCDU book. I would look for opportunities to buy local banking stocks MBT, BPI, UBP, SECB, CHIB and PNB. For a stock like TEL which has a huge U.S. dollar cash flow, I think that things can only go better with a higher dollar. The same possibly holds true for GLO. A quick positive move was seen in the price of TUNA which moved higher because most of its sales go to exports.
Anyway, it is again a time for a long hard look at portfolios because this move should give us a chance to buy strong stocks at a bargain. I am referring to the likes of AP, URC and RLC which have been unrelenting in their price appreciation. I believe that there would be a lot of room for these stocks to go.
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