Gone with the wind

When I first thought about writing a column on the stock market a few weeks ago, I was actually planning some positive spin into it: the dawn of a new era in equities trading with the country implementing fiscal reforms and as the outlook on the corporate sector turns positive in general.

There was reason to be upbeat. The market was threading a new high in years. First quarter corporate earnings were generally positive. The outlook on the once doomed mining sector was robust, with foreign investment to come in droves following a Supreme Court ruling that allowed foreign participation in the sector.

Telecom firms continued to defy expectations of a slowdown as subscribers continued to increase even as growth had somewhat moderated. Property sales and loan growth were also expected to rebound.

On the fiscal front, the government posted a budget surplus for the two straight months in April and May as revenue collections rose following the implementation of new taxes.

The prospect of the economy in general was bullish, with a rebound in agriculture likely, and the services sector expected to continue outperforming other sectors.

Inflation, which is watched closely by the central bank in determining whether to tighten monetary policy, was also forecasted to slow down in the second half. This should keep consumption at a steadily growing pace.

These were the elements investors were trading on. Or so it seemed.

Changing tide

Unfortunately, the market has essentially erased the gains it had made since the start of the year. Regular trading volumes that were above P2 billion have already been halved.

Dealers have often blamed Wall Street for the country’s recent market performance decline for the simple reason that the Philippines has always been tracking the movement of the US market. But is Wall Street all to blame?

Other regional bourses have similarly tagged the US market, and like the Philippines, had not been spared when Big Brother tumbled down. Actually, we should take comfort in the fact that our losses had not been as heavy as others simply because our market is not big as theirs.

Hot money basics

Fear that the Fed would continue to increase interest rates in the US to arrest inflation had sent investors rushing out of our equities market and into fixed dollar assets, such as Treasury bonds and corporate debt notes, which became more attractive with rising interest rates.

Now, the US has once again become the favored destination among fund managers, prompting them to immediately start pulling out their funds in many emerging economies, not only from the Philippines.

And this is what the so-called "hot money" is all about. Portfolio investments do go away faster than they come, and are thus unreliable indicators of investor confidence.

Currently, the Bangko Sentral’s overnight rates are still higher than the US Fed’s target rate, but the differential has been narrowing after the US increased its rates for 17 consecutive months since 2004.

Our central bank has meanwhile kept its rates unchanged in the past nine policy meetings, and recent rate increases in the US as against the peso’s weak performance in the past weeks are now putting pressure on the monetary authority to eventually tighten its policy stance.

Effect of higher interest rates

So how is that connected to the stock market?

Well, higher interest rates mean banks will also have to jack up its own yields, which in turn could dissuade their clients from borrowing, therefore dampening demand for loans.

For companies, this could mean having to pay higher amounts for their debt servicing. This could discourage them from expanding their businesses because a major cost of doing business – debt – becomes more expensive.

For property firms, higher yields could mean lower sales as discouraged individuals defer plans to buy a house or heavily burdened business companies opt to keep their current office spaces.

These are the immediate impact of a rate increase, and it is not surprising to see why banking and property stocks are the first to fall in a scenario of rising interest rates. It has nothing to do with the fundamentals of the companies; rather, it is a reflection of the economy’s outlook, i.e., the likelihood of an economic slowdown, should rates rise.

Perhaps we’ve overlooked another simple fact as well. It is summer in the US, and most fund managers are with their families on vacation. This means some have unwound their long positions, took profit on investments here and there, and have generally taken the scenario of rising yields as an excuse.

Speculation starts anew

So what does a falling market mean for investors? For those who know the market well enough, it is an opportunity to come in at more attractive price levels. Bargain-hunting is the name of the game. That, however, doesn’t mean every stock is a good buy.

Sit down, filter what is essential, and study a company’s fundamentals before deciding to accumulate its shares. There is such a thing as cautious investing, something that most market players need to be reminded of especially on days when the equities market remains largely speculative.

Remember what analysts usually say: When there is fear, be greedy. When there is greed, be fearful.

Bigger Philippine Poker Tour returns

Philippine Poker Tour, a proponent of non-wager poker tournament, has just announced the launching of the biggest Hold’em Philippine Championship to date with minimum guaranteed prizes of up to P3 million for the top 20 placers. The tournament is being conducted in partnership with Philippine Amusement and Gaming Corp. (Pagcor), the country’s gaming authority.

The competition consists of eight qualifying legs to be held at Casino Filipino sites at Tagaytay City, Angeles City and Cebu City. The first leg will be played at Casino Filipino Tagaytay on 29th July 2006 hosted by its amiable senior branch manager Alexander I. Betita. The grand finals is scheduled on 16th and 17th December 2006 at Casino Filipino Pavilion at UN Avenue, Manila.

For more details, visit PPT official Website, www.PhilippinePokerTour,com <http://www.philippine-pokertour.com/> or call the Secretariat (c/o Cindy) at 817-9092 or 812-0153.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected] or at [email protected]. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.