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Don't be concerned about the stock market's weakness.

After rising by a total of 7.3 percent in January, the Philippine Stock Exchange index (PSEi) is now showing signs of weakness. Not surprisingly, some are concerned since the PSEi also performed strongly in January last year, but then ended 2018 lower by 12.8 percent.

However, we don't expect to see a repeat of 2018 this year since fundamental factors that triggered the recovery of the Philippine stock market and emerging markets remain in play.

Domestically, inflation continues to go down. In January, headline and core inflation rates both fell to 4.4 percent from 5.1 percent and 4.7 percent in December, respectively. Lower inflation should help keep interest rates stable and boost consumer confidence, which in turn should lead to higher consumer spending.

Despite delays, the Senate and House of Representatives ratified the 2019 national budget earlier this month. This should allow government spending to resume its rapid growth pace later this year as it no longer operates under a reenacted budget, thus helping boost economic growth.

Outside of the Philippines, factors that triggered the reversal of foreign fund flows back to emerging markets including the Philippines also remain in play.

Recall that the US dollar strengthened last year as the US Fed was one of only a handful of central banks that raised rates in 2018 given the strong performance of its economy despite signs of a global slowdown. The strong dollar coupled with higher rates were responsible for funds flowing out of emerging markets into the US last year.

However, in the January Federal Open Market Committee meeting, the members voted not to increase benchmark rates. Aside from implying that it would stop raising interest rates, the minutes from the said meeting also implied the Fed would stop shrinking its balance sheet in the second half of the year given downside risk to economic growth.

The latest numbers continue to support the view that the US Fed will stay on hold. For example, core capital goods orders for December fell 0.7 percent after falling by 1 percent in November, reflecting a slowdown in business spending. Meanwhile, the US manufacturing purchasing managers' index fell to a 17-month low of 53.7 in February from 54.9 in January as survey respondents cited weaker demand due to uncertainty brought about by the ongoing trade war.

Finally, even after rising by 6.6 percent for the year-to-date period, the PSEi is still trading at a reasonable valuation of 16.9X P/E (price to earnings ratio), well below its peak multiple of more than 20X P/E. Numerous stocks are also still trading at depressed valuations.

Consequently, although we are not discounting the possibility that the Philippine stock market could go down in the short term as some capitalize on the market's recent strength to lock in profits, any drop will most likely be temporary. As such, investors should not be afraid.

Rather, they should take advantage of the market's ongoing weakness to accumulate stocks.

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Publication:Philippines Daily Inquirer (Makati City, Philippines)
Date:Feb 25, 2019
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