Gus Cosio says so

Ideas on the Philippine Stock Market

FED up?

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.


February 19, 2010 - Posted by | Financial markets in Asia


  1. hi sir gus,

    i would just like to ask your advice as i got to think about the effect of discount/interest rates in dollar investments. i’m planning to invest a few dollars. what would be the best vehicle?

    and i’m trying to understand how the discount/interest rates possibly going up soon affect any dollar investments?

    i think on a dollar-holder (e.g. OFW) perspective, the dollar exchange rate here in the philippines is “weak” at 46.2 as of today. any insight on how the rates would affect such rate here in the philippines? and also the dollar mutual funds and other investment vehicles maybe? i hope i make some sense.

    Comment by jakeonline | February 19, 2010 | Reply

    • Jake,
      First of all, the hike in the U.S. discount rate is positive for the dollar vis-a-vis the Euro and other major currencies because it allays fears that the U.S. had fueled inflation and because interest rates have been very low. It signals that the U.S. central bank will not allow further expansion of the money supply at a pace similar to last year’s.
      Currencies like the PHP are strongly influenced by capital flows. Nowadays, we are seeing most of net capital inflows from OFW remittances. That is why the PHP is strong vs. the US$. I do not see the PHP moving significantly past 47 in the short term and 48 is even a bigger challenge. In the meantime, I see the local stock market rising by around 15% from now to the end of 2010. If your eventual need is PHP, I would say do not overweight yourself in US$. If you want to be in US$, I suggest you find a fund that is invested in Asian equities notably China, India and the ASEAN. Otherwise, your returns will be very meager and in PHP terms, you might even have a negative return.

      Comment by Gus Cosio | February 20, 2010 | Reply

  2. Gus, i have 25k as an initial investment(im still a newbie investor), and i want to use it to buy PNB stock only. do you think this is a good idea? or should i consider getting others? or if it’s not to much of a hassle, it would be of great help if you could help me pick stocks for my portfolio. thank you very much!

    Comment by JimBoy | February 20, 2010 | Reply

  3. Jim,
    Today, if I only had 25k, I would put my money in 2 stocks. PNB would be one, and I’d choose from DMC,MPI or AP because all these three stocks have exposure in the power sector. I think the power sector has a lot of growth in the next 5 years. If I wanted to put it in one stock, it would be TEL. Ten shares would cost roughly 25,500. It’s a kind of stock that you can just forget and have a look twice a year.

    Comment by Gus Cosio | February 21, 2010 | Reply

  4. What’s going on with FGEN? Do you know, Tito Gus? 😦

    Comment by Nicole | February 22, 2010 | Reply

  5. Hi Nicole,
    I haven’t heard of anything new. One reason why it hasn’t been moving higher with the rest of the market is the rights issue which got paid in January this year has left many looking to take profits which is around 10 and above. My calculation of break even for most holders is 9.50 so the overhang is between 9.50 to 10. Besides, with the market range trading, there is little impetus for a breakout. But if you can be patient, you’ll see this above 10 before year end.

    Comment by Gus Cosio | February 22, 2010 | Reply

  6. thank you for that suggestion sir Gus! you’re the MAN!

    Comment by JimBoy | February 23, 2010 | Reply

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