PSEi Seen to Recover In 2017 Despite Headwinds
PSEi write-up from the Trading Edge Equity Advisor:
December 29, 2016
It was literally a roller coaster ride for the local market over the past couple of years. After reaching an all-time high of 8,136.97 in 2015, the index had since slid back to 6,952.08, effectively erasing all of its gains for that year and more. 2016 was not any different. The index actually welcomed the new year with a bang to the downside as it fell off the cliff to a low of 6,084, a drop of almost a thousand points inside just 3 weeks in reaction to the first US Fed hike which snowballed to the devaluation of the Chinese Yuan against the USD. Prospects, however, of a robust domestic GDP boosted by a one-off national election spending had lifted the index back from the dead. Strong growth of 6.8% in the 1Q16 followed by renewed optimism to the newly elected President Duterte’s 10-point economic agenda which focuses on hard infrastructure spending had supported the market’s climb. This was of course further boosted by the expected 7% economic expansion in the 2Q16. And just like that, the index was once again flirting with its all-time record high.
Rich valuations and President Duterte’s anti-US rhetoric have softened the market’s optimism. Optimism turned into fund outflows as concerns regarding Brexit and more importantly prospects of a higher interest rate in the US started to weigh on the Philippine peso and as a result on the local equities market. The local index’s eventual decline from its peak was further aggravated by the unexpected win by the populist Donald Trump of US’s presidency, expected US Fed rate hike and a more hawkish monetary policy outlook in 2017. Just like 2015, the index erased all of its gains for the year after it revisited its all-time peak, losing by 1.6%.
From a technical standpoint, believe it or not, the notable up and down swings that the local market have endured as evidenced by how the local index vibrated in the last 3 years, was actually already suggested by an application of an Elliott Wave Theory over the index’s historical movement in the last 15 years. As you can see from above, the index is already trading within the wave 4 of a multi-year Elliott Wave cycle. If it’s any consolation, its position in the bigger cycle (inside wave IV) suggests that an up leg in wave V is forthcoming perhaps in the next 1-2 years.
Meanwhile, the index may likely continue to trade in a volatile manner but this time with an upward tilt in the coming new year. Actually, unwinding of the recent position bought for window dressing purposes at the beginning of January 2017 and risk of a Trump presidency to emerging markets like the Philippines (with huge BPO and overseas service sectors) may lead to another flush down. However, the index’s close proximity to its major support at the 6,400 zone leads us to believe that a potential turning point is just around the corner. For 2017, recovery will likely be the theme as the local market is poised to recover from its recent slide. Still, there will be a lot of headwind that the market is up against: faster interest rate increases in the US, Trumpeconomics, geopolitical risks in the Eurozone, persistent weakness of the Philippine peso against the USD and prospects of higher borrowing costs in the Philippines. Discounted valuations, robust GDP growth, double digit corporate earnings growth, promise of more infrastructure spending by the government, and the index’s technical position both short and long term already warrants a “Buy on Dips” call for the index and the blues of the market. For 2017, the index may grind quite possibly back to the 8,000 marker.
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