• Philippine Stock Exchange Index: Technical & Fundamental Outlook (AUG 2012)

    Philippine Stock Exchange Index: Technical & Fundamental Outlook (AUG 2012)

    Here’s the way we see the state of the Philippine Stock Exchange Index, PSEi or the PCOMP. Using Elliot Wave Theory (EWT), we counted the start of the bull trend from 2009 bottom up until the peak at August 2011 as a big Wave 1. Wave 2 came on a sharp A-B-C correction that brought the index back to the level of the previous Wave 4 (of the big Wave 1) at around 3,700 on September 30, 2011. Note that this is one of the guidelines of the EWT, ‘correction lands at the price area of the previous wave 4.” The index then rallied and established a new all-time high at 5,400 last July. The run from the September 2011’s low to its most recent high, we believe, is the Wave 1 of a bigger Wave 3. Its recent decline that we are still seeing could be the Wave 2 of the bigger Wave 3. While it appears that the correction (smaller Wave 2 characterized as a-b-c) might not be ending yet, we can say that there is still a lot of room for the index to go higher.

    EWT states that Wave 3 is usually the longest. Since the height of the big Wave 1 is about 2,500, adding this to the September bottom suggests that the index could reach 6,250, assuming that Wave 1 and Wave 3 is at least of equal height. And that is just the target of Wave 3. There is still another up move in the form of Wave 5, after another correction of course following Wave 3.

    In any case, the index could still dip to as low as 4,850 before heading back up north.

    On the fundamental side, a lot of factors support the strength of the index.

    • One is that a bear market turn is usually seen during periods of high inflation.  This is not the case now. In fact, the present inflation number is so benign (at the low end of the central bank’s target of 3-5%) that the BSP plans to bring down the overnight interest rate to a new all-time low this coming October. Cutting the interest rates entices businesses and individuals to borrow, spend, and expand since it is cheaper to do so.
    • Another positive catalyst would be the likely credit rating upgrade of the Philippines in the near future, bringing our rating to investment grade. Having such status would cause higher money inflows, more investments.
    • Moreover, the government’s plan to spend more on infrastructure should support GDP growth, job creation, tourist arrivals, etc.
    • In addition to this, investors and analyst know that earnings growth of companies should support the rise of their share prices. For 2012, the average estimate of major foreign houses on the earnings growth of companies was only between 13-15%. As recently reported, a lot of companies beat expectations with astonishing first half net income growth. Some companies made 20%, some made 60%, etc. The question now is, can this be sustained in the second half? Most probably yes especially now that we head into the Christmas season.

    Given all of these factors, fundamentals and technicals, we can say with confidence that the index is poised to move higher still despite the recent dips that it is presently seeing now.

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