Gus Cosio says so

Ideas on the Philippine Stock Market

A tipping point?

9:30am Tuesday  19 October 2010

Yesterday, I met with a European diplomat who was posted in the Philippines from 2002 to 2005.  The diplomat had left the country for an assignment in South America, in Uruguay to be exact.  For those who do not know where Uruguay is, it is a small country tucked between Brazil and Argentina.  Because it is not as vast as its two neighbors Uruguay chose to develop as Singapore did in Southeast Asia, as a financial center.  It’s capital, Montevideo, had been an off-shore banking center since the 1970’s where wealthy Brazilians, Argentinians and Chileans had squirreled away some of their cash.  Of course the mega bucks always find their way to Switzerland, but in essence, living in Montevideo would give you an idea of how the wealthy in developing economies behaved with their wealth.  Furthermore, you would have had a profound view of a BRIC country such as Brazil, one of the most dynamic economies of this decade.

This European diplomat was reassigned to Asia in 2007, but no longer in the Philippines.  The person got a posting in Thailand.  I got to know about this person because the diplomat had invested in the FAMI equity fund and similarly maintained a Firstmetrosec securities account.  It then occurred to me that perhaps this diplomat had a Filipino spouse and thus the reason for keeping investment in the country.  I was wrong because the spouse was also European.  I have no idea of what this person’s entire investment portfolio looked like, but I had to ask why this person kept on investing here considering that there was no familial link to the country.

The answer was pretty straightforward.  This person was of the belief that investment in the developed countries will not be seeing significant growth in the future.  East Asia was likely to outpace the developed markets and this person believed that the Philippine market was a good place to diversify into.  Remember, this person had already been exposed to Brazil.

This is probably a unique story, but what strikes me about it is it comes directly to my sphere of experience.  I cannot ignore phenomenon in nature that when you see an ant in your kitchen, you know that it is not alone.  So when I see a foreign individual investing directly in the Philippine market, he or she cannot be alone but likely to be part of an unidentifiable group of like-minded people.  In the best-selling non-fiction, The Tipping Point, the author notes that oftentimes we do not spot a trend until a point when a critical mass is already involved.  Thus, the tipping point.

What comes to mind is the foreign capital that is probably massing into markets such as ours.  It is probably just in the process of building up.  We have probably seen just an ant, but there is likely to be a swarm that is there but is not yet visible to us.  Its significance to day-to-day trading in the short run is that it underpins values of the high-profile stocks in the market.  No wonder MER continues to be expensive and the buying on AP and AEV continues to be relentless.

Thoughts pass through my mind that perhaps the reason that PEs are rising is because there are simply a lot of buyers waiting in the wings.  Perhaps, that is why in spite of a not so warm reception of Cebu Pacific among locals, the stock is oversubscribed by foreigners.  Furthermore, I do not believe that foreign funds are simply being sucked into this market.  I think that there is a deliberate move to increase long-term portfolio weights in this market simply because there is a swarm of individuals wanting to gain exposure to this market.  Who knows?  I may even be right.

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

34 Comments »

  1. Hi sir gus,

    I’ve just started trading two months ago and i’ve been reading your posts regularly. Thanks for all the info you guys have been sharing! May I just ask because I noticed this in one of my trading pages… what is the relationship between the BUY volume and UP volume? I saw that whenever a buy order was entered, its volume increases but its UP only sometimes does?

    Thanks so much 🙂

    Comment by Nica | October 19, 2010 | Reply

  2. Ants in the kitchen – what a nice analogy. Lets all hope you’re right too. The more investors are involved, the more there will be an opportunity to trade. Makes me glad i’m involve in the market right now. Now when things are afoot.

    Comment by jasper | October 19, 2010 | Reply

  3. Hi S’Gus Good Day!

    Again thank for the sharing & insight based on your personal experience , we do hope our economy should continue to go “bullish”..

    Btw, just wanted to share, i have seen some pics of the ORE Mine site during the visit last week, this was posted on the FB account of one of the visitors who go there in palawan..

    It shows that pile of ORE was ready for shipment.. Hope this would have a big impact on ORE’s performance.

    Comment by Blogspot | October 19, 2010 | Reply

  4. Mr. Cosio,

    You just wrote my personal biography. I have been investing for 35 years, throughout the world. Seven years ago I began investing at a measured pace in the Philippines. I also have no family ties, no property, and no national allegiance to the Philippines. This being said, I have worked with Filipinos all over the world in the engineering sector. The professionalism, pride and motivation of those people motivated me to delve into the economy of the Philippines. Now there is no turning back for me personally.

    I can clearly see that as more Filipinos become familiar with securities trading, and as more individual wealth is distributed amongst the middle class, personal investments are increasing as a positive trend. Filipino investors are now demanding transparency by the companies with whom they have a vested interest, sometimes with pit bull tenacity. This is a good thing as someone needs to watch the fox in the hen house.

    My take on individual foreign investors in the Philippines.
    1. They know Filipinos are well educated and national pride abounds.
    2. The market, until recently was extremely undervalued, and is still undervalued in my opinion.
    3. The number of securities listed on the PSE are few. By this I mean that by the time you go through sectors and eliminate what you personally do not like, the number of companies listed for personal analysis is quite few in comparison to other stock markets. Imagine trying to analyze the energy sector in the USA. I don’t have a team of analysists to assist me! The Philippines makes it easy for you!
    4. To the educated foreigner, the Pearl Of the Orient is still just that!

    Anyway, I am rambling and I type fast!

    Mr. Cosio, thanks again for all your information. I absorb your blog each and every day.

    Regards,

    Comment by Juanito | October 19, 2010 | Reply

    • Hey Juanito,
      I am pleased to make your acquaintance, even if only through this blog. I wish you all the success you need in all your investing activities. God bless you.
      Gus

      Comment by Gus Cosio | October 19, 2010 | Reply

  5. Hi Sir gus,

    Thank your for your guidance for every blog you make. I always look forward reading your new posts. Lets hope that this bullish market trend is a tipping point for more opportunities and growth.

    The book by Gladwell is really very inspiring. It tells us how the small things can make a big difference. beyond the tipping point you see an unstoppable upward trajectory of exponential popularity/influence/breakthroughs.

    Lets hope for the best for our stocks. we may see that critical mass clearly soon.

    Comment by pikachu | October 19, 2010 | Reply

  6. Hi sir Gus?

    Do you suggest to cutloss on PX and transfer to ORE? Thank you so much.

    Comment by jaayem | October 19, 2010 | Reply

    • Jaayem,
      While PX and ORE are both mining stocks, I believe that having them both in a portfolio is in itself good diversification. ORE is nickel and PX is copper and gold. I think I mentioned before that I own both PX and ORE. I do not think that you should own only on or the other.

      Comment by Gus Cosio | October 19, 2010 | Reply

      • thank you sir.

        Comment by jaayem | October 19, 2010

  7. Sir Gus, you have always assured us that despite the erratic movements in the market lately, the dawn is coming. Thanks!

    Comment by Topmace | October 19, 2010 | Reply

    • Topmace,
      If markets were not erratic, it is not a proper market. Volatility is what give life to a market. Volatility is a diversity of opinions working their way into the prices of stocks.

      Comment by Gus Cosio | October 19, 2010 | Reply

  8. Hello there Mr. Cosio,

    You mentioned that locals gave a not so warm reception to cebu pacific. I was under the impression that it was heavily bought. Friends of mine from citisec mentioned that they were only allowed a maximum of 200 shares each? and a local broker friend mentioned to me that he managed to acquire a few shares but it still wasnt enough for his clients?

    Norman

    Comment by Norman Go | October 19, 2010 | Reply

    • Hi Norman,

      Re Ceb Ipo, I read a local broker say that it is expensive. I read a foreign broker say that it is reasonably priced versus regional airlines. Somehow their point of reckoning and comparisonare a bit different.

      thanks

      Comment by alex | October 19, 2010 | Reply

      • thats the same kind of confusion ive been hearing the past few weeks…. I’ve already purchased some, so at this point I just hope I am right 🙂

        Comment by Norman Go | October 19, 2010

      • Hi,

        Local retail trader here in the Philippines are mostly momentum/technical trader (and unfortunately they dont love Gokongwei’ stocks as it is not a volatile stock)

        Institutional investor, most of the time, are in for a long term. (short-term to them is 1 year).

        If you analyze CEB, it has very strong fundamentals, which is the a major factor for institutional investor. Yes, at IPO price, it is not cheap nor expensive (as sir Gus mentioned on his previous blog entry). But if you take into consideration long-term horizon, that would be another story.

        A lot of conglomerates are making huge investments in tourism. SMC has airport to develop in Boracay (?), AGI has ResortWorld plus the bay area (w/ Pagcor). SM Investment also has a huge investment plan for the bay area. Surely, this conglomerates does not just targets Filipino people….they are targetting the foreigners. And who has the command for inter-island travel, CEBU pac of course.

        Plus we are an achipelago, I myself, will pay premium on air travel vs. sea travel – for time savings. This is a unique situation as compare with other regional budget carrier.

        CebuPac is also slowly leading the market share not only in inter-island travel, but also domestic cargo (they are actually getting big shares away not just with PAL but also from the shipping industry).

        If you take into consideration those factors, CEB is a reasonable for institutional investor.

        I will definitely own CEB shares, but not during the IPO 🙂

        Comment by Raymond | October 19, 2010

    • Norman,
      From the information flow that I got, I learned that there were many shares that were returned to the PSE by the brokers. Those that were returned were easily taken up by other brokers who had excess demand for shares. One local fund manager I know picked up around 50 million pesos worth from the shares returned to the PSE. I guess institutions appreciate Cebu Pacific better than individual traders particularly because many individual traders are wary of the Gokongwei companies. Personally, I think those companies are very well run, so it seems that what they have is a stab on Gokongwei himself.

      Comment by Gus Cosio | October 19, 2010 | Reply

      • wow… that should make next week pretty interesting then. I’ve put in a substantial amount myself simple because I like the direction Cebu Pacific is heading. How about you sir gus? did you purchase any shares yourself?

        Norman

        Comment by Norman Go | October 19, 2010

  9. Hello Sir Gus,

    Its really an inspiration for me reading your blogs. This is no joke. I myself am a foreigner, but being born and raised here since birth. I’m proud to say that I am very lucky to be here in the Philippines. I invest here because I believe that the Philippines has a very bright future despite what the problems the country is facing. It was a rough road, but now seems that the road will be straight to success.

    More Power Sir and More Power Philippines!!

    Comment by Foreign Investor | October 19, 2010 | Reply

    • nice encouragement foreign investor. i love to be here in philippines and i love the culture and i love the good business. I’m born here and I like to stay here until I die.

      Comment by joppy gwapo | October 19, 2010 | Reply

  10. Hi sir Gus,

    Does it mean the “not warm” reception by locals is a bad signal for those who availed of the IPO. I got just a 200 shares last week and from what I read, after the IPO the stock (CEB) will dive from its IPO price.

    Thanks sir.

    Comment by Olive | October 19, 2010 | Reply

  11. what the.. just before I went to work MB was 68 and falling to 67.. Now its suddenly 70!? what happened..

    I was confused whether to buy MBT that time, but since I wanted to have worthwhile holdings on a stock I like, I opted to buy my second batch of RCB instead.. hrrmm.. :askance:

    Comment by jasper | October 19, 2010 | Reply

    • It was just due to the foreign investors who heavily sold Metrobank shares because of the SRO which is valued at 45 pesos. Now you can see Foreigners are flocking back to Metrobank shares.

      Comment by Foreign Investor | October 19, 2010 | Reply

      • how does a SRO work btw? And isn’t 45p very cheap compared to its current price of 70?

        Comment by jasper | October 19, 2010

      • My definition of this is that current shareholders can buy this issue @ 45. It seems to be like a dividend. But then price might correct afterward due to its cheap SRO price

        Here is the definition from Investopedia:
        Issuing rights to a company’s existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period.

        Comment by Foreign Investor | October 19, 2010

      • Could you sell these really cheap shares in the market after you get it? This is my first time participating in one. I got smdc. If its current price is at let’s say 9, what would happen to it once the new shares have been released @6.36?

        Comment by Nica | October 19, 2010

      • @Nica,

        Yes it is possible.
        Practical reason is when you avail SRO, you get number of shares (in the case of MBT @45.00 while the market is trading at aroung 67+), normally at a cheaper price. It a way of saing “thank you” for being a share holder, and because of that you have an option to add position at discounted rate.

        When you add position via SRO, you average acquisition cost will adjust, and with that…you have an option to “top slice” certain shares so that you can allocate it to other stock. So you can sell it even lower with the current market price (but of course higher with you average acquisition cost, in the end you gain something as against to simple top slicing).

        The only problem here is when the market price dives down to the level of SRO price. That happens after the announcement of MBT, but other investor who are on the side (either waiting for correction, or have liquidated some of their top earning stocks) are quick to take advantage of the situation.

        Comment by Raymond | October 19, 2010

  12. Hi Sir Gus,

    SLI has been dropping for the past two weeks I think. Do you think its already the perfect time to add more of it?
    Or will it drop even below 2 pesos? You own some SLI right?

    Thanks. More power

    Comment by pikachu | October 19, 2010 | Reply

    • Pikachu,
      I do not know if it will drop below 2 but if it does, I’ll probably buy more. I think 2 is reasonable.

      Comment by Gus Cosio | October 19, 2010 | Reply

      • Finally, I was able to add SLI to my core portfolio. I had to topslice on AGI to buy SLI. But it’s okay, I’ll buy AGI on dips na lang. 😀

        Comment by Sonn | October 20, 2010

  13. i hope those foreign investments are large ones and not the small investors program

    Comment by mike | October 19, 2010 | Reply

  14. Sir Gus,

    What do you think of the Lopez stocks: LPZ, EDC & FGEN. Are they ripe for a re-entry? I am also looking at MPI and FLI.

    Thank you

    Comment by steve | October 19, 2010 | Reply

    • Steve,
      I am positive on all these stocks. With limited resources at hand, I would put most of my bets on EDC today.

      Comment by Gus Cosio | October 21, 2010 | Reply

  15. sir gus, can u giv a comment on my current holings. mpi, dgtl, mer, tel, edc, at, bpi, fli, meg, ore, and ceb. should i be adding or selling on these? is there any other stocks u would recomend i have?

    Comment by gerald | October 19, 2010 | Reply

    • Gerald,
      I do not think anything has changed in these stocks. Markets consolidate and some stock prices go down. If you are convinced that we are in a bull market, then you should welcome consolidations. If you do not think we are in a rising trend, you should not be in stocks at all.

      Comment by Gus Cosio | October 19, 2010 | Reply


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